Capital Gains Tax on Inherited Real Property in the Philippines
A comprehensive legal guide for heirs, executors, buyers, and real-estate practitioners
1. Overview
Inherited real property is not hit by capital gains tax (CGT) when it passes from the decedent to the heirs; the transfer is instead subject to estate tax. CGT becomes relevant only later—when the heirs (or the estate) sell, barter, exchange, or otherwise dispose of the inherited land or building that is classified as a capital asset.
2. Statutory & Regulatory Framework
| Source | Key provisions |
|---|---|
| National Internal Revenue Code of 1997 (NIRC), as amended | §24(D) & §27(D)(5) – 6 % CGT on sale of real property located in the Philippines, classified as capital asset; §§248–249 – surcharges & interest |
| Republic Act No. 10963 (TRAIN Law, 2017) | Retained 6 % CGT rate but overhauled forms & penalties; clarified zonal-value rules |
| RR 13-99, RR 16-00, RR 7-03, RR 2-2023, plus assorted RMCs | Implementing rules on valuation hierarchy, electronic Certificate Authorizing Registration (eCAR), and one-time transaction (ONETT) audits |
| Republic Act No. 11213 & RA 11569 | Estate-tax amnesty (2019-2025); eCAR requirement before post-amnesty sale |
| RA 11976 (Ease of Paying Taxes Act, 2024) | Introduces BIR Form 1706-A, allows electronic CGT payment and harmonizes ONETT documentary checklist |
3. CGT vs. Estate Tax & Donor’s Tax
| Scenario | Estate tax | CGT | Donor’s tax |
|---|---|---|---|
| Death of owner | Yes (6 % flat on net estate in excess of ₱5 M) | No | No |
| Heirs partition property in equal shares | Already paid | No (partition is nontaxable) | No |
| Heir A buys out Heir B’s share | N/A | Yes (6 % on higher of selling price or FMV of B’s share) | No |
| Heir donates inherited land to child | N/A | No | Yes (donor’s tax, 6 % over ₱250 k net gifts) |
4. Triggering Events for CGT on Inherited Property
- Sale – most common; includes conditional or installment sales.
- Exchange – e.g., swapping parcels with a neighbor.
- Dacion en pago / datio in solutum – property given in lieu of debt.
- Contribution to a corporation (unless a tax-free exchange under §40(C)(2)).
- Unequal settlement that effectively transfers ownership for consideration.
Not taxable: Partition, reconveyance, consolidation of title, expropriation sale to the government (subject to 6 % creditable withholding tax instead of CGT).
5. Rate and Tax Base
| Item | Rule |
|---|---|
| Rate | 6 % final tax (no deductions, no offset of capital losses) |
| Tax base | Whichever is higher of: (a) gross selling price, (b) BIR zonal valuation, or (c) fair market value (FMV) per latest Tax Declaration |
| Improvements | Value of buildings/structures form part of FMV |
| Currency | Convert foreign-currency proceeds to PHP using BSP rate on date of sale |
6. Exemptions & Preferential Treatments
- Sale of a principal residence by an individual (including one acquired through inheritance) is CGT-exempt once every 10 years if the entire proceeds are used to buy/build a new principal residence within 18 months (§24(D)(2)).
- Tax-free exchanges under §40(C)(2) (property for shares, same control ≥51 %).
- Expropriation by the government – CGT is replaced by 0 %/1.5 % creditable withholding tax.
- Low-cost & socialized housing sold by accredited developers – subject to 1.5 % creditable withholding tax, not CGT.
- Transfer to an heir without consideration (partition) – no CGT.
Always secure a BIR ruling if exemption is unclear.
7. Filing, Payment & Documentary Requirements
| Step | Deadline / Form | Notes |
|---|---|---|
| File & pay CGT | Within 30 days from notarization of Deed of Sale · BIR Form 1706 (now 1706-A electronic) | One return per property; pay at RDO where property is located |
| Secure eCAR | Issued after taxes paid | Required by Registry of Deeds (RD) for transfer of title |
| DST (Documentary Stamp Tax) | 1.5 % of higher of price or FMV | File BIR Form 2000-OT within 5 days of end of month |
| Local transfer tax | 0.5 % – 0.75 % within 60 days | Paid to LGU Treasurer |
| Registration fees | Per RD schedule | For new TCT/CCT |
Core documentary checklist (BIR ONETT):
- Notarized Deed of Absolute Sale / Deed of Extrajudicial Settlement with Sale
- Owner’s duplicate TCT/CCT
- Latest Tax Declaration (land & improvement)
- Certificate of Estate Tax Payment or eCAR for estate (if estate tax already settled)
- IDs & TINs of parties (use Form 1904 for parties w/o TIN)
- Official receipts for CGT & DST payments
- Sworn declaration of no improvements (if vacant land)
- SPA, board resolution, or court order if signatory is agent/executor
8. Illustrative Computation
| Particulars | Amount (₱) |
|---|---|
| Selling price in deed | 3,200,000 |
| Zonal value (BIR) | 3,000,000 |
| Tax base (higher) | 3,200,000 |
| CGT @6 % | 192,000 |
| DST @1.5 % | 48,000 |
| Local transfer tax @0.75 % (e.g., Quezon City) | 24,000 |
Penalties: Surcharge 25 % (or 50 % if willful), plus 20 % p.a. interest on overdue CGT and DST.
9. Sale by the Estate vs. Sale by the Heirs
| Factor | Sale by Estate (still under settlement) | Sale by Heirs (estate settled) |
|---|---|---|
| Seller’s TIN | Estate TIN (apply at RDO 39) | Each heir’s TIN (joint sale) |
| Who signs | Executor/administrator (court-appointed) | All heirs or their attorney-in-fact |
| Need estate tax clearance first? | No (estate still open) | Yes – estate tax must be paid and CAR issued |
10. Ordinary vs. Capital Asset Caveat
If the inherited property was used in business or held for sale by the decedent (e.g., real-estate dealer) it may be an ordinary asset. Sale of an ordinary asset is subject to graduated income tax (or 15 % MCIT/RCIT for corporations) and 12 % VAT if seller is engaged in trade or business. Correct classification is crucial.
11. Common Pitfalls & Practical Tips
| Pitfall | How to avoid |
|---|---|
| Under-declaring selling price | Always compare deed price with zonal & assessor’s FMV; BIR will recompute |
| Skipping estate tax before sale | Pay estate tax first; attach eCAR to deed of sale |
| Treating partition as taxable sale | Equal partition is non-taxable; unequal exchange triggers CGT/donor’s tax |
| Forgetting DST/local taxes | RD will not transfer title without receipts |
| Using wrong TIN (decedent’s) | Apply for Estate TIN; estate is a separate taxpayer |
| Missing 30-day deadline | Pay ASAP; request waiver of surcharge only if force majeure |
12. Interplay with the Estate-Tax Amnesty (2019-2025)
Heirs who avail of the amnesty (6 % on net undeclared estate) must first secure the amnesty eCAR; only then can the property be sold. Subsequent sale follows the ordinary CGT rules above.
13. Recent & Forthcoming Developments
- eCAR Digitization & Auto-validation – pilot launched 2024; full roll-out expected 2025 under RA 11976.
- One-Time Transaction (ONETT) Center consolidation – walk-in and online queueing unified.
- Electronic payment channels – BIR Form 1706-A payable through PESONet & InstaPay-linked apps.
- Pending bills propose lowering CGT to 4 % on low-value rural housing; not yet law (as of Aug 2 2025).
14. Key Takeaways
- CGT applies only when inherited real property is sold or disposed of, not upon inheritance.
- Rate is 6 % on the greater of selling price, zonal value, or assessor’s FMV.
- Pay CGT within 30 days of notarization and secure an eCAR before the Registry of Deeds will transfer the title.
- Settle estate tax first, ensure correct asset classification, and watch out for DST, local transfer tax, and registration fees.
- Exemptions (principal-residence rollover, tax-free exchange, expropriation, partition) exist but require strict compliance and, often, a prior BIR ruling.
Disclaimer: This article summarizes prevailing Philippine tax rules as of August 2, 2025. Tax laws change, and BIR issuances can refine procedures without legislation. Always consult a Philippine tax professional or the Bureau of Internal Revenue for transaction-specific advice.