Capital Gains Tax on Inherited Property in the Philippines

A practitioner-oriented guide

1. Overview

In Philippine taxation, capital gains tax (CGT) is a 6 % final tax imposed on the sale, exchange, or disposition of real property located in the Philippines that is classified as a capital asset under the National Internal Revenue Code (NIRC), as amended. Receiving property through inheritance is not a taxable “disposition,” so no CGT is triggered at the moment of succession; instead, the estate is generally subject to estate tax. CGT only becomes relevant when the heirs (or the estate) later dispose of the inherited property for consideration.

2. Key Statutory Provisions

Law / Regulation	Salient Points
NIRC § 24(D)	Imposes a 6 % CGT on gains presumed to have been realized from the sale, exchange, or disposition of real property located in the Philippines and classified as capital asset, by an individual citizen, resident alien, or non-resident alien.
NIRC § 27(D)(5) & § 28(A)(6)(c)	Extend the 6 % CGT regime to domestic and resident foreign corporations.
R.A. 10963 (TRAIN Law, 2017)	Overhauled estate and donor’s taxes (both now at 6 %) but kept the CGT rate at 6 %.
Revenue Regulations (RR) 13-99, RR 2-98 (as amended), RR 1-2021, RMO 15-03, et al.	Implementing rules on documentary requirements, valuation, deadlines, issuance of Electronic Certificate Authorizing Registration (eCAR), and penalties.

3. Capital Asset vs. Ordinary Asset

Capital asset: All property held by the taxpayer not used in trade or business. Most residential or idle lots fall here.
Ordinary asset: Property used in business (inventory, office building, subdivision lots of a real-estate developer, etc.). Sale of an ordinary asset is subject to creditable withholding tax (CWT) and, in some cases, Value-Added Tax (VAT)—not CGT.

Inherited property is classified according to its use in the hands of the decedent. If the decedent used it as an ordinary asset (e.g., rental apartment of a lessor), the heirs inherit the ordinary character. Otherwise, it is a capital asset.

4. When Does CGT Arise for Heirs?

Scenario	CGT Due?	Other Taxes
Transmission mortis causa (inheritance)	No. Transfer is covered by Estate Tax (6 % of net estate).	Estate tax return within 1 year of death.
Extrajudicial or judicial partition of the estate (no sale)	No CGT, but pay documentary stamp tax (DST) on conveyances.
Sale/Exchange by the estate before settlement	Yes. Estate (as separate taxpayer) files BIR Form 1706 and pays 6 % CGT.
Sale by heirs after settlement	Yes. Each heir (or their representative) is solidarily liable for CGT.

5. Tax Base and Valuation Rules

Tax base = 6 % × Higher of:
- Selling Price (SP) per Deed of Sale, or
- Fair Market Value (FMV) determined as
  - Zonal value published by the BIR, or
  - FMV per Tax Declaration issued by the assessor.
If consideration is partly non-cash (e.g., barter), use the FMV of property received.
For installment sales of capital assets, the entire 6 % CGT is due upon notarization of the deed, regardless of when cash is actually received.

6. Filing, Payment, and Documentary Requirements

Step	Who Files	Form / Doc	Deadline
Compute CGT	Seller/Heirs	Working sheet	—
File & pay CGT	Seller/Heirs	BIR Form 1706 (or eFPS)	Within 30 days of notarization/execution of the deed
Pay DST	Buyer	BIR Form 2000-OT	Same 30-day period
Secure CAR / eCAR	Seller/Heirs (or buyer’s rep)	Deed of Sale, TINs, IDs, proof of payment, estate tax clearance, tax declarations, Cert. of No Improvement (if vacant land), etc.	Issued after validation
Register transfer	Buyer	Registry of Deeds (Transfer CTC & new TCT/CCT)	Following CAR issuance

Tip: For undivided estates, BIR may require a Deed of Extrajudicial Settlement with Sale and proof that estate tax has been paid or is covered by the 2019–2023 Estate Tax Amnesty (R.A. 11213 as extended by R.A. 11569 & RR 17-2021).

7. Exemptions, Preferential Treatments, and Special Situations

Sale of a principal residence by a natural person may be exempt if:
- Proceeds are fully utilized in acquiring or building a new principal residence within 18 months;
- The taxpayer files a certified undertaking with the BIR (RR 14-99);
- Availment not more than once every 10 years.
Sale to the Government, its agencies, or GOCCs: Taxpayer may choose 6 % CGT or regular income tax on actual net capital gain, whichever is lower (NIRC § 24(D)(1)).
Tax-free exchanges / corporate reorganizations: If property is transferred to a corporation in exchange for shares and the transferor gains control, the transaction may qualify for tax-free exchange (NIRC § 40(C)(2))—no CGT, subject to BIR confirmatory ruling.
Agrarian reform transfers: Sale to qualified beneficiaries/Land Bank under CARP may be exempt from CGT (PD 27, RA 6657 implementing rules).
Estate Tax Amnesty (R.A. 11213, as extended): Settling the estate under the amnesty removes penalties, but it does not waive future CGT when heirs sell the property.

8. Penalties for Non-Compliance

Surcharge: 25 % for late filing; 50 % for willful neglect or fraudulent return.
Interest: 20 % per annum (TRAIN) on unpaid tax from due date until full payment.
Compromise penalty per BIR table (varies by amount).
No eCAR, no transfer: Registry of Deeds will not issue a new title without eCAR.

9. Illustrative Example

Facts: Heirs inherited a residential lot in Quezon City on 31 March 2020. FMV (zonal) = ₱8 million. They sell it on 15 July 2025 for ₱9 million, deed notarized same day. CGT computation:

Higher of SP (₱9 M) vs. FMV (₱8 M) = ₱9 M

CGT = 6 % × ₱9 M = ₱540,000

File BIR 1706 and pay on or before 14 Aug 2025 (30 days).

Buyer's DST: 1.5 % of ₱9 M = ₱135,000 (BIR 2000-OT).

10. Frequently Asked Questions

Question	Short Answer
Does CGT apply when I merely transfer the title from my late father’s name to ours?	No. That is part of estate settlement; pay estate tax instead.
If there are five heirs, do we each pay 6 %?	No, the 6 % applies once on the gross selling price/FMV. Heirs are jointly liable; tax is typically paid out of sale proceeds before distribution.
Is CGT creditable against my income tax?	No. It is a final tax.
Can I deduct acquisition cost or improvements?	Not for CGT on real property—the 6 % is on gross selling price/FMV, not net gain.
What if we sell under installment?	Entire CGT is still due within 30 days from notarization.

11. Recent Developments and Administrative Trends

eCAR and ONETT (One-Time Transactions) processing have moved largely online or appointment-based since 2020.
RR 1-2021 clarified deadlines for ONETT forms and established electronic signatures for CARs.
BIR Digitalization: Pilot‐testing eONETT portals in selected RDOs; expect broader roll-out.
Proposed Rationalization of Real Property Valuation (CREATE-MORE bills) may eventually align zonal values with market values and shift certain transactions from CGT to VAT/expanded income tax regimes—monitor legislative updates.

12. Practical Tips for Practitioners and Heirs

Settle the estate first—pay estate tax or avail of amnesty to avoid disputes when seeking eCAR for the sale.
Secure certified true copies of tax declarations and latest zonal values early; valuation disputes delay CAR issuance.
Use separate checks for CGT and DST payable to “Bureau of Internal Revenue.” Bank validation is faster than RDO cashiers.
Keep the original deed un-notarized until all parties are ready; the 30-day clock starts upon notarization.
Consider BIR Ruling for complex set-ups (e.g., corporate transfers, tax-free exchanges) to avoid future assessments.

13. Conclusion

Capital Gains Tax becomes relevant to inherited real property only at the point of sale or other taxable disposition. While the 6 % rate seems straightforward, navigating valuation rules, estate-settlement pre-conditions, and strict procedural timelines can be intricate. Early estate settlement, accurate classification of the asset, and diligent compliance with BIR’s One-Time Transaction protocols remain the most reliable safeguards against costly penalties and title-transfer delays. Always consult the latest revenue regulations and, when in doubt, seek a formal ruling or advice from a Philippine tax professional.

This article is for general information only and does not constitute legal advice. For transactions with significant tax impact, consult a lawyer or a certified public accountant specialized in Philippine taxation.