1) The basic framework: when “Capital Gains Tax” applies to real property

In Philippine taxation, Capital Gains Tax (CGT) on real property is a final tax imposed on certain dispositions of real property located in the Philippines. The governing rule is found in the National Internal Revenue Code (NIRC), as amended, particularly the provisions imposing a 6% final tax on the sale, exchange, or other disposition of real property classified as a capital asset.

A. The 6% CGT rule (in plain terms)

When CGT applies, the tax is generally:

CGT = 6% × (higher of: (a) Gross Selling Price, or (b) Fair Market Value)

The “Fair Market Value” for CGT purposes is determined using statutory benchmarks (discussed in detail below), most notably BIR Zonal Value and the local assessor’s fair market value (FMV).

B. Not every real property sale is subject to CGT

CGT is not the default tax for all real estate transactions. The first question is always:

Is the real property a CAPITAL ASSET or an ORDINARY ASSET?

That classification dictates whether the transaction is taxed under CGT (final tax) or under regular income tax (and possibly VAT/percentage tax, depending on the seller and nature of business).

2) Capital asset vs. ordinary asset: the classification that decides everything

A. What is a “capital asset”?

For real property, a capital asset is essentially property not used in business and not held primarily for sale to customers in the ordinary course of business.

Typical examples:

A residential lot owned by an individual not engaged in real estate dealing
A house-and-lot held for personal use
Land held as an investment, not used in business operations

B. What is an “ordinary asset”?

Real property is generally an ordinary asset if it is:

Inventory or held primarily for sale to customers (e.g., real estate dealer/developer)
Used in business (e.g., office building, warehouse, factory site) and treated as business property
Property of a taxpayer engaged in real estate business where classification rules treat it as ordinary

If the property is ordinary, the sale is typically subject to:

Regular income tax (net income basis), and
VAT (if applicable) or percentage tax, depending on the seller’s VAT status and the nature of transaction

Key point: CGT is generally for capital asset real property dispositions.

3) Who is subject to CGT on real property?

A. Individuals

Individuals selling real property in the Philippines that is classified as a capital asset are generally subject to 6% CGT, except where an exemption applies (notably the principal residence exemption, discussed later).

B. Corporations

Domestic corporations (and certain other corporate taxpayers) may also be subject to 6% CGT on the sale of land and/or buildings not used in business (i.e., capital assets). If the property is an ordinary asset, regular corporate income tax rules apply.

4) What transactions trigger CGT?

The law covers sale, exchange, or other disposition. In practice, CGT issues arise not only from outright sales but also from transactions that effectively transfer ownership or beneficial ownership.

Common triggers:

Deed of Absolute Sale
Deed of Exchange
Dacion en pago (property given in payment of debt)
Foreclosure (judicial or extrajudicial), in many cases with tax consequences tied to the transfer/registration and applicable rules
Transfers for consideration where the BIR treats the event as a taxable disposition

Important: The label of the transaction is less important than its substance and whether there is a taxable disposition recognized for CGT purposes.

5) The CGT tax base: Gross Selling Price vs. Fair Market Value

A. Gross Selling Price (GSP)

This is generally the total consideration stated in the deed (money and/or money’s worth), including:

Cash price
Assumption of liabilities as part of consideration
Other property or benefits received

B. Fair Market Value (FMV): two benchmarks, pick the higher

For CGT, the FMV is generally determined as the higher of:

BIR Zonal Value (per the latest BIR zonal valuation for the property’s location), or
FMV per the Local Assessor (often reflected in the tax declaration/schedule of market values)

Then, compare that FMV to the Gross Selling Price, and the tax base becomes the higher of the two.

So the comparison is effectively:

Determine FMV = higher of (Zonal Value, Assessor’s FMV)
Determine Tax Base = higher of (Gross Selling Price, FMV)
Apply 6%

This “higher-of” structure is the reason “understated consideration” in deeds frequently leads to BIR assessments based on zonal/assessed values.

6) Zonal value: what it is, why it matters, and how it’s used

A. What is “zonal value”?

Zonal value is the BIR’s prescribed value per square meter (or otherwise specified unit basis) for real property by zone, used as a benchmark for tax purposes. It is published through BIR issuances and is applied by the RDO having jurisdiction over the property.

B. Why zonal value matters

Zonal value often becomes the minimum tax base benchmark because:

If the stated selling price is low, the BIR will usually compute based on FMV, which often uses zonal value as the higher figure.
Zonal values can sometimes exceed local assessor FMV, particularly where assessor schedules lag behind market movement.

C. What value applies: “latest zonal value”

In practice, the BIR applies the zonal value effective as of the date relevant under BIR rules (commonly tied to the date of notarization/execution of the deed for filing/payment purposes). This is critical when zonal values have been updated and a transaction sits near an effectivity date.

D. Zonal value is location-specific (and can be granular)

Two properties in the same city can have different zonal values depending on:

Barangay/zone classification
Road classification (main road vs. interior)
Commercial vs residential designation in the BIR zoning schedule
Corner lots, subdivisions, or special classifications in the zonal tables

E. When there is no zonal value for a specific property

If no zonal value is available or applicable for a certain classification, BIR practice generally falls back to the assessor’s FMV, but this should be handled carefully because BIR offices may require documentation (tax declarations, certifications, maps) to establish the correct basis.

7) Land vs. improvements: what counts as “real property” for CGT?

A. “Real property” includes land and improvements

For CGT on real property, the taxable property generally includes:

Land, and
Buildings and other improvements attached to the land (e.g., a house, commercial building)

In many ordinary real estate deals described as “house and lot,” the transaction is treated as a transfer of both land and improvements, and the CGT base is computed accordingly.

B. Why land vs. improvements still matters

Even though CGT applies to the disposition of real property (which can include both land and buildings), separating “land” from “improvements” matters because:

Valuation is often itemized Zonal value schedules commonly provide separate valuations for:
- Land (per square meter)
- Improvements/buildings (by type, class, or unit area) The assessor’s tax declaration also typically separates:
- Assessed FMV of land
- Assessed FMV of improvements
Partial transfers happen There are cases where:
- Land is sold but a building is excluded (rare and legally complex)
- Building ownership is separate from land ownership (possible in certain legal arrangements)
- Co-ownership or partition results in transfer of one component’s interest
Ordinary vs capital classification can differ by asset and taxpayer context While the CGT regime generally looks at the property disposed, business use can complicate things. For example:
- A corporation may hold a building used in operations (ordinary asset) while holding a separate parcel as investment (capital asset).
- Proper classification must be supported by accounting treatment, actual use, and applicable rules.

C. Are “improvements” always included?

In common practice:

If the deed describes the sale as land with improvements (or “house and lot”), then improvements are included.
If the deed describes only land, but the title and circumstances suggest improvements are part of what is transferred, the BIR may still look at the total reality of the transaction.

Legal caution: Under civil law principles, buildings can be treated as immovables and generally follow the land, but separate ownership scenarios exist (e.g., builder in good faith, rights of a lessee who constructed improvements under certain arrangements, condominium regimes, etc.). For tax purposes, the BIR will usually require clear documentary proof if a party claims that improvements are excluded from the taxable transfer.

D. Valuation of improvements in CGT computation

Where improvements are part of the transfer, the FMV computation usually considers:

Land zonal value × land area, plus
Improvement/building zonal value (or assessor FMV of improvements), depending on what is applicable and higher under the rules

Because “FMV” is often computed as the higher of zonal value or assessor FMV, and because both land and improvements can have separate values, the practical approach is:

Determine FMV (land) using higher of land zonal value vs land assessor FMV
Determine FMV (improvements) using higher of improvement zonal value vs improvement assessor FMV (where applicable)
Sum them to get FMV (property)
Compare against gross selling price

Note: Specific office practices vary on presentation (some compute as a combined FMV figure, others require itemization). The legal logic remains: the tax base is anchored on the “higher-of” rule.

8) Can parties allocate the price between land and improvements to reduce tax?

A. Allocation in the deed does not control if it is inconsistent with FMV

Parties can state separate amounts (e.g., ₱X for land, ₱Y for building). However:

The BIR is not bound by an allocation that appears designed to depress the tax base.
If the total or component valuations fall below FMV benchmarks, BIR will generally compute using FMV.

B. Artificial allocations can create other tax problems

Improper allocation can trigger:

Questions on documentary stamp tax (DST) base
Issues in local transfer tax computation
Possible deficiency assessments and penalties if undervaluation is found

9) The “higher-of” rule in practice: common scenarios

Scenario 1: Selling price is lower than zonal value

Deed price: ₱2,000,000
FMV (zonal/assessor): ₱3,500,000 Tax base becomes ₱3,500,000 → CGT = 6% × ₱3,500,000 = ₱210,000

Scenario 2: Selling price is higher than FMV

Deed price: ₱5,000,000
FMV: ₱3,500,000 Tax base becomes ₱5,000,000 → CGT = ₱300,000

Scenario 3: “Low land value / high improvement value” in the deed

Even if parties assign most of the price to improvements, the BIR will still benchmark the total using FMV rules and may scrutinize component valuation if inconsistent with zonal/assessor schedules.

10) Installment sales and deferred payments: does it change CGT?

CGT on capital asset real property is generally computed on the tax base (higher of selling price or FMV) and paid within the prescribed period under BIR rules, typically tied to the date of execution/notarization of the deed—not when full payment is received.

This can surprise sellers who think CGT follows cash collections. For capital asset real property subject to CGT, the system is closer to a transaction-based final tax than an income-recognition scheme.

11) The principal residence exemption (for individuals)

A. The exemption concept

Individuals selling their principal residence may qualify for exemption from CGT, subject to statutory conditions and BIR requirements. In general terms, the exemption is tied to:

Use of the proceeds to acquire or construct a new principal residence within the prescribed period
Compliance with documentary and procedural requirements
Limits and frequency restrictions under the law and regulations

B. Practical implications

The seller typically must signify intent to avail and comply with required filings.
Failure to comply with conditions (e.g., failure to reinvest within the period) can result in CGT becoming due, often with penalties.

Because the exemption is heavily compliance-driven, the BIR’s documentation requirements (proof of principal residence, proof of utilization of proceeds, timelines, and sworn declarations) are crucial.

12) Related taxes and costs that commonly appear with CGT transactions

Even when CGT is the income tax treatment, transfers of real property commonly involve additional taxes and fees:

Documentary Stamp Tax (DST) Generally imposed on the deed/transfer document and commonly computed using the same “higher-of” base concept applied for property transfers.
Local Transfer Tax Imposed by local governments (province/city), typically based on consideration or FMV benchmarks.
Registration fees (Registry of Deeds) and notarial fees
Real property tax (RPT) clearance requirements LGUs often require proof of updated RPT payments for transfer processing.

These do not replace CGT; they are parallel obligations tied to the transfer and registration process.

13) Compliance mechanics: returns, deadlines, and the Certificate Authorizing Registration (CAR/eCAR)

A. Filing and payment

For CGT transactions, BIR requires:

Filing of the appropriate CGT return (commonly BIR Form for CGT on real property)
Payment within the prescribed period (commonly within a set number of days from notarization/execution under BIR rules)

B. CAR/eCAR as the gatekeeper to title transfer

The Certificate Authorizing Registration (CAR) (now commonly processed as an electronic CAR or eCAR) is required by the Registry of Deeds before it will register the deed and issue a new title.

In practice:

No CAR/eCAR → no registration → no transfer of title on record This is why zonal value and valuation disputes are usually encountered during CAR processing.

14) Foreclosure, dacion, and “other disposition”: land/improvement valuation still applies

Where the transfer is not a simple sale (e.g., dacion en pago, foreclosure), valuation issues still arise:

The BIR will still look for the applicable tax base using the “higher-of” structure.
The characterization of the transfer and the documents executed determine the taxable event and processing requirements.
For foreclosures, the timeline of transfer and which instrument is being registered (certificate of sale, final deed, etc.) affects when and how taxes are processed in practice.

15) Risk points, disputes, and practical legal issues

A. Zonal value disputes are usually factual and documentary

Taxpayers commonly dispute:

Wrong zone classification
Incorrect property use classification (commercial vs residential)
Incorrect land area or boundary assumptions
Application of an updated zonal value when parties believe an earlier schedule should apply

Resolution often requires:

Vicinity maps, barangay certifications, subdivision plans
Tax declarations and assessor certifications
Clear description of location and boundaries

B. Misclassification (capital vs ordinary) can be costlier than valuation issues

If the BIR determines the property is an ordinary asset when reported as capital asset:

The seller may face assessment under regular income tax
Potential VAT/percentage tax exposure (depending on seller and transaction)
Surcharges, interest, and penalties

C. Land vs improvements: documentation must match legal reality

If claiming that only land is being transferred (or improvements excluded), documentation must support:

Separate ownership or separate transfer reality
Proper descriptions in titles, tax declarations, and instruments
Consistency across LGU and BIR records

16) Key takeaways

CGT (6%) applies to dispositions of Philippine real property classified as a capital asset, generally computed on the higher of gross selling price or FMV.
FMV is anchored on the higher of BIR zonal value and the local assessor’s FMV, and this benchmark often overrides “low” deed consideration.
Land and improvements are generally both part of real property for CGT purposes; separate valuation matters because zonal and assessor values are typically itemized.
Zonal value drives many CGT computations and disputes; correct zone classification and effectivity timing are frequently decisive.
Compliance is transaction-gated: without BIR CAR/eCAR, registration and title transfer are effectively blocked.