Pasalo transactions have become a common method for transferring ownership of house and lot units in the Philippines, particularly in residential subdivisions and developer-financed properties. Under a pasalo arrangement, the buyer assumes the seller’s remaining loan obligations—typically amortizations on a bank loan or developer contract—while often paying an equity amount that reflects the difference between the property’s current market value and the outstanding balance. This form of transfer raises specific capital gains tax (CGT) considerations under Philippine tax law.

Legal Basis of Capital Gains Tax on Real Property

Capital Gains Tax is governed by Section 24(D) of the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act No. 10963 (TRAIN Law). The law imposes a final tax of six percent (6%) on the sale, exchange, or other disposition of real properties classified as capital assets. A capital asset is any property held by the taxpayer that is not used in trade or business, not inventory, and not depreciable property used in business.

For residential house and lot units sold through pasalo by individual owners who acquired the property for personal use, the asset is generally classified as a capital asset. The 6% CGT applies regardless of whether the property is the seller’s principal residence. The TRAIN Law removed the previous rollover exemption that allowed deferral of tax when proceeds were reinvested in a new principal residence.

The tax is computed on the higher of:

The gross selling price (GSP), or
The fair market value (FMV) as determined by the Bureau of Internal Revenue (BIR) zonal valuation or the assessed value fixed by the local government, whichever is higher.

This presumptive gain approach means the actual cost basis or capital gain realized by the seller is irrelevant; the tax is imposed on the gross amount.

Application to Pasalo Transactions

A pasalo is treated as a sale or disposition of real property (or rights thereto) for tax purposes. Whether the transaction is documented as a Deed of Absolute Sale (when title is already in the seller’s name) or a Deed of Assignment of Rights (when the property is still under a Contract to Sell with the developer), the transfer triggers CGT liability on the part of the seller (assignor).

The critical feature of pasalo is the assumption of the mortgage or loan by the buyer. Philippine tax jurisprudence and BIR rulings consistently hold that the amount of the outstanding loan or amortization balance assumed by the buyer forms part of the gross selling price. This is because the seller is relieved of a liability, which is economically equivalent to receiving additional consideration.

Components of Gross Selling Price in Pasalo:

Cash or equity payment made directly by the buyer to the seller.
The full outstanding principal balance of the loan or contract price assumed by the buyer.
Any other valuable consideration, such as assumption of unpaid association dues, taxes, or developer fees transferred to the buyer.

Example Computation: A house and lot unit has a zonal value of ₱8,000,000. The outstanding loan balance is ₱4,500,000. The buyer pays the seller ₱2,000,000 in cash equity and assumes the ₱4,500,000 loan.

Gross Selling Price = ₱2,000,000 (cash) + ₱4,500,000 (assumed loan) = ₱6,500,000.

Since the zonal value (₱8,000,000) is higher, CGT is computed on ₱8,000,000.

CGT due = 6% × ₱8,000,000 = ₱480,000.

The seller remains liable for the full CGT even if the actual cash received is only the equity portion.

Who Bears the Tax Obligation

The seller (original owner or assignor) is the taxpayer legally obligated to pay the CGT. This liability arises upon the execution of the deed of sale or assignment, not upon full payment of the assumed loan or transfer of title. In practice, parties may negotiate that the buyer shoulders or reimburses the CGT as part of the overall pasalo consideration, but this is a contractual arrangement and does not shift the statutory liability away from the seller.

Failure of the seller to pay the CGT prevents the issuance of the Certificate Authorizing Registration (CAR) by the BIR, which is required for the Register of Deeds to effect the transfer of title or annotation of the assignment.

Compliance Procedure and Timeline

Execution of Document – The parties execute a notarized Deed of Absolute Sale or Deed of Assignment of Rights, clearly stating the total consideration, including the assumed loan amount and its details (bank/developer, account number, outstanding balance).
Filing and Payment – The seller must file BIR Form No. 1706 (Capital Gains Tax Return) and pay the tax within thirty (30) days from the date of the sale or execution of the instrument.
Documentary Requirements –
- Notarized deed of sale or assignment.
- Proof of payment of the equity (official receipt or bank deposit slip).
- Statement of account or certification from the bank/developer showing the outstanding balance assumed.
- Latest tax declaration and zonal valuation certification from the BIR.
- Seller’s TIN and valid government ID.
Issuance of CAR – Upon payment and verification, the BIR issues the CAR, which the buyer presents to the Register of Deeds together with the deed for registration.
Local Transfer Taxes and Documentary Stamp Tax – While not part of CGT, these are related obligations. Documentary Stamp Tax (1.5% of the higher of GSP or FMV) is usually shouldered by the buyer, as is the local transfer tax (0.5%–0.75% depending on the city or municipality).

Special Considerations in Pasalo House and Lot Units

Properties Still Under Contract to Sell (CTS): Assignment of rights over a CTS is subject to the same 6% CGT. The BIR treats the rights to the property as a capital asset. Developer approval and payment of transfer fees are additional requirements but do not exempt the transaction from CGT.
Mortgaged Properties with Banks: When the buyer assumes the mortgage, the bank usually requires its consent and may demand updated appraisal or payment of assumption fees. The CGT computation still includes the full assumed balance as part of the GSP.
Undervaluation Risks: If the stated equity or total consideration is significantly below the zonal value, the BIR may impose the tax on the higher zonal value and assess deficiency taxes, plus penalties.
Ordinary Asset Rule: If the seller is a real estate dealer or habitually engaged in the sale of properties, the house and lot may be classified as an ordinary asset. In such cases, CGT does not apply; instead, the transaction is subject to 12% Value-Added Tax (VAT) and regular income tax on the actual gain. Proper classification is crucial and depends on the seller’s primary business.
Non-Resident Sellers: Alien individuals or foreign corporations selling Philippine real property are also subject to the 6% final CGT. Additional requirements, such as securing a Tax Clearance Certificate (TCL), may apply.
Installment Sales: If the pasalo involves payment of equity in installments, the CGT is generally due on the entire consideration within 30 days of the sale. Installment treatment for CGT on real property is limited and requires specific BIR approval.

Penalties for Non-Compliance

Late payment of CGT incurs a 25% surcharge, plus 20% annual interest, and compromise penalties. More critically, the transfer cannot be registered without the CAR, leaving the buyer exposed to risks regarding clear title. In cases of willful underdeclaration, criminal prosecution for tax evasion may be pursued.

Practical Recommendations in Pasalo Transactions

Parties should engage a lawyer or notary familiar with real estate transactions to draft the deed with precise language on the assumption of loan and allocation of tax responsibilities. A written agreement should explicitly state the total consideration for tax purposes to avoid disputes with the BIR. It is advisable to obtain a pre-transaction zonal valuation confirmation and, where possible, secure a BIR ruling on complex assumption-of-mortgage structures.

Pasalo transactions offer practical flexibility in the Philippine housing market, but they demand careful attention to capital gains tax obligations. Proper computation that includes the assumed loan balance, timely filing of the CGT return, and securing the CAR are essential to a valid and enforceable transfer of house and lot units. Compliance ensures the buyer acquires clean title while protecting both parties from future tax assessments.