I. Executive Summary

A pasalo (assumption of mortgage) involves a buyer taking over a seller’s remaining loan on a condominium unit, often with a cash “key money” component paid to the seller. For individual sellers holding the condo as a capital asset (i.e., not used in business/trade and not held by a real estate dealer), the transfer is generally subject to the 6% Capital Gains Tax (CGT), computed on the higher of (a) the total consideration (cash paid plus the mortgage assumed) or (b) the Fair Market Value (FMV) as determined for tax purposes. The deal also triggers Documentary Stamp Tax (DST), local transfer tax, and registration fees. If the seller is engaged in the real estate business and the condo is an ordinary asset, CGT does not apply; instead the sale is generally subject to income tax (and possibly VAT) and creditable withholding tax (CWT) rules.

This article explains the legal framework, the correct tax base in pasalo structures, timing, documents, common pitfalls, and worked examples.

II. Legal Characterization of a Pasalo

A pasalo is not a special species of sale. It is a sale/assignment of the condo (or of the seller’s rights thereto) with assumption of mortgage. Depending on the paper trail, you will see either:

Deed of Absolute Sale with Assumption of Mortgage (if the title is in the seller’s name and a real estate mortgage with a bank exists), or
Deed of Assignment of Rights/Contract to Sell (if the unit remains under a developer Contract to Sell and title is still under the developer, often with the developer/bank’s written consent).

In both cases, the economic consideration is the cash paid to the seller plus the outstanding principal of the loan that the buyer assumes (interest is not part of the selling price). For tax, that consideration is compared to the FMV used by the tax authorities, and the higher figure becomes the tax base.

III. When CGT Applies (vs. Ordinary Asset Rules)

CGT (6%) applies when an individual sells real property classified as a capital asset (e.g., a personal-use condo not used in trade or business).
CGT does not apply when the seller is a real estate dealer or a VAT-registered enterprise holding the condo as an ordinary asset. In that case:
- The sale is subject to ordinary income tax (or corporate income tax, as applicable),
- Possibly 12% VAT (subject to exemptions/thresholds and special rules), and
- The buyer may be required to withhold CWT at graduated rates on the higher of the consideration or FMV.

Practice cue: Correct asset classification drives the entire tax posture. Misclassifying a dealer’s unit as a capital asset is a common, costly mistake.

IV. The CGT Base in a Pasalo

A. The “Higher of” Rule

For capital assets, CGT = 6% × Higher of:

Total Consideration (cash to seller + mortgage principal assumed), or
FMV for tax purposes (e.g., zonal value for the condo or, if none, FMV per tax declaration—applied to condo improvements and the corresponding proportionate value of the land/condo project, as relevant).

B. What Counts as “Consideration” in a Pasalo

Include:
- Cash/key money paid to the seller at closing, and
- Outstanding principal balance of the housing loan the buyer will assume (as of transfer date).
Exclude:
- Future interest and penalty charges on the assumed loan,
- Association dues, taxes in arrears, and similar non-price obligations (though they can affect net economics between the parties).

C. Special Notes on FMV

FMV means the tax authority’s valuation benchmark, not a private appraisal.
If there is both a zonal value and a tax declaration value, the higher of the two is used for FMV comparison.

V. Timing and Compliance Milestones

CGT Return & Payment (Capital Asset Sales): Generally within 30 days from the date of notarized deed (or from receipt of first downpayment in installment structures).
DST (on the sale/assignment instrument): Filing and payment follow statutory monthly deadlines.
Local Transfer Tax: Payable to the LGU where the condo is located, prior to title/condo-cert transfer.
Certificate Authorizing Registration (CAR/eCAR): Issued after tax payments and required documents; essential for annotation on title (or for developer turnover/transfer if title is still with the developer).

Installment note: For capital asset sales on installment, revenue practice allows proportionate payment of CGT as collections are received, but the tax base remains the higher of the total contract price or FMV. Clarify the schedule at filing to avoid penalties.

VI. Documentary Flow (Typical)

If title is already in the seller’s name
- Deed of Absolute Sale with Assumption of Mortgage (with bank’s written consent to assume).
- Certified statement from the bank of the outstanding principal as of transfer date.
- Tax returns: CGT and DST; LGU transfer tax.
- CAR/eCAR issuance; annotation at Registry of Deeds; issuance of new Condominium Certificate of Title (CCT).
If title is still with the developer (Contract to Sell)
- Deed of Assignment of Rights (often tripartite: seller–buyer–developer; bank consent if loan already booked).
- Developer’s confirmation and updated statement of account.
- Tax returns: CGT and DST (assignment of rights over real property is typically treated as a taxable transfer of real property interest).
- CAR/eCAR in the assignee-buyer’s favor to enable the developer to issue the CCT directly to the assignee upon full payment.

Practice cue: If the seller is a dealer (ordinary asset), replace CGT with CWT/Income Tax/VAT compliance. The CAR will be supported by CWT certificates rather than CGT proof.

VII. Other Taxes and Fees

Documentary Stamp Tax (DST) on sale of real property (including assignment of rights): effectively 1.5% of the higher of consideration or FMV.
Local Transfer Tax: Typically up to ~0.75% in highly urbanized cities/Metro Manila; lower in some provinces (check LGU ordinance).
Registration Fees: Registry of Deeds schedule based on value bracket.
Notarial Fees and bank/processing fees (if mortgage is assumed/novated).

VIII. Worked Examples

Example 1: Title in Seller’s Name; Clear Pasalo

Cash to Seller (K): ₱1,200,000
Outstanding Principal Assumed (M): ₱3,800,000
Total Consideration (TC): K + M = ₱5,000,000
FMV (zonal/tax authority): ₱4,600,000

CGT base = higher of ₱5,000,000 (TC) or ₱4,600,000 (FMV) ⇒ ₱5,000,000 CGT (6%) = ₱300,000 DST (~1.5%) = ₱75,000 Local Transfer Tax (assume 0.75%) = ₱37,500 (Plus registration and incidental fees.)

Example 2: Assignment of Rights; FMV Higher Than Contract

Cash to Assignor (K): ₱500,000
Loan Principal to Assume (M): ₱2,000,000
Total Consideration (TC): ₱2,500,000
FMV (zonal): ₱3,100,000

CGT base = higher of ₱2,500,000 and ₱3,100,000 ⇒ ₱3,100,000 CGT (6%) = ₱186,000 DST (~1.5%) = ₱46,500 Local Transfer Tax (0.5% assumed province) = ₱15,500 (Plus registration and incidental fees.)

Observation: When FMV exceeds the economic price, CGT is computed on FMV, not on the lower actual price.

IX. Complexities, Edge Cases, and Structuring Notes

Arrears and Penalties: Buyer’s agreement to shoulder delinquent interest/penalties does not increase the selling price for CGT (those are not part of the price of the asset), but may be relevant to the parties’ net economics.
Assumption vs. Novation: A clean novation (creditor-bank’s consent to substitute debtor) clarifies that the buyer has fully assumed the obligation. Without it, you may have assumption of payments internally but the bank still looks to the seller—this does not change CGT, which follows the transfer of property/rights, not the bank’s internal bookkeeping.
Installment Sales: If the buyer pays the seller in tranches (in addition to assuming the mortgage), the CGT filing can be aligned with collections (for capital assets), but the base remains the higher of total price or FMV.
Parking Slots/Storage Units: If titled/contracted separately, compute taxes per instrument; if included in the same deed, add to the base.
Partial Assignments: Assigning a fractional interest (e.g., co-owners) requires computing CGT, DST, and local transfer tax on the pro rata value assigned, subject to the same higher-of rule.
Ordinary Asset Trap: If the seller claimed depreciation or used the unit in business (e.g., as an Airbnb enterprise on the seller’s books), the condo may be an ordinary asset—CGT treatment likely fails; expect income tax/CWT and possibly VAT instead.
Related-Party Transactions: Expect heightened scrutiny of understatements of price; authorities can test for arm’s-length value using FMV benchmarks.

X. Practical Checklist

For Seller (Capital Asset scenario):

Confirm asset classification (capital vs ordinary).
Obtain bank’s outstanding principal certificate as of transfer date.
Prepare the correct deed (sale with assumption or assignment of rights) and secure bank/developer consents.
Compute CGT (6%) on max(TC, FMV); prepare DST and local transfer tax.
File and pay on time; secure CAR/eCAR.
Prepare for turnover at Registry of Deeds/developer.

For Buyer:

Verify title status (CCT vs CTS), encumbrances, developer consents, association dues status.
Budget for DST, local transfer tax, registration, and bank fees (assumption/novation).
Ensure taxes are settled and receipted before lodging for transfer.

XI. Frequently Asked Questions

Q1: Can we declare just the cash portion as price since I’m assuming the loan? No. For CGT, the consideration includes the mortgage principal assumed. Authorities will compare (cash + assumed principal) against FMV and pick the higher as the tax base.

Q2: The developer still holds the title—do we pay CGT now? Yes, the assignment of rights over the condo is treated as a taxable transfer of a real property interest. You compute and pay CGT (if capital asset) and DST, then obtain the CAR/eCAR to enable eventual titling.

Q3: The seller is a real estate dealer—do we still pay CGT? No. If the condo is an ordinary asset of a dealer or business taxpayer, CGT does not apply. Expect income tax/CWT treatment (and possibly VAT) instead.

Q4: Are interest and penalties on the assumed loan part of the base? No. Only outstanding principal on the loan increases the selling price for CGT purposes.

Q5: Who pays which tax? By practice and contract, CGT is often for the seller’s account; DST and local transfer tax are commonly for the buyer—but parties may reallocate by agreement. Authorities care that taxes are paid, not who bears the cost internally.

XII. Model Computation Template (Capital Asset; Pasalo)

Let:

K = cash paid to seller at closing
M = outstanding mortgage principal assumed
TC = K + M (Total Consideration)
FMV = applicable tax FMV (zonal/tax dec benchmark)
Base = max(TC, FMV)

Then:

CGT = 6% × Base
DST (sale/assignment instrument) ≈ 1.5% × Base
Local Transfer Tax = LGU rate × Base (use the LGU’s published rate)
Plus: registration and incidentals

XIII. Key Takeaways

In a pasalo condo transfer by an individual (capital asset), CGT is 6% of the higher of: (a) cash + assumed mortgage principal, or (b) FMV.
Ordinary asset sales (dealers/business taxpayers) do not use CGT; they follow income tax/CWT (and sometimes VAT) rules.
DST (~1.5%), local transfer tax, and registration fees apply on top of CGT (or CWT/VAT, as applicable).
Timely filing (CGT within ~30 days of the deed/initial collection) and complete documentary support are essential to obtain the CAR/eCAR and finish the transfer.
Correct asset classification, a clean assumption/novation, and accurate mortgage principal figures are the practical make-or-break points in pasalo deals.

If you want, I can adapt the model computation to your numbers (cash portion, principal outstanding, and FMV/zonal) and produce a one-page closing tax sheet you can attach to your deed.