Capital Gains Tax on Real Property Sales in the Philippines: Computation, Scope, and Legal Framework

Updated for the post-TRAIN/CREATE landscape; Philippine law references are to the National Internal Revenue Code (NIRC), as amended, and relevant revenue issuances. This article focuses on capital gains tax (CGT) on sales of real property classified as capital assets.

1) Big Picture: What CGT Is (and Isn’t)

Capital Gains Tax (CGT) is a final tax of 6% on the sale, exchange, or other disposition of land and/or buildings located in the Philippines classified as capital assets. It is computed on the higher of:

the Gross Selling Price (GSP) in the deed, or
the Fair Market Value (FMV), defined as the higher of the BIR zonal value or the assessor’s market value (Tax Declaration).

CGT is not an income-tax regime for business property. If the real property is an ordinary asset (e.g., held by a real estate dealer/developer or actually used in business), the transaction is generally outside CGT and instead falls under regular income tax (or corporate income tax) and may be subject to VAT or percentage tax, plus Documentary Stamp Tax (DST).

2) Who Pays CGT and When It Applies

A. Sellers Covered

Individuals (resident or nonresident) selling land and/or buildings that are capital assets.
Corporations selling land and/or buildings that are capital assets are also subject to the 6% final CGT (separate from corporate income tax on ordinary assets).

Capital asset = any property not classified as ordinary asset. Ordinary assets include: stock-in-trade, property held for sale to customers in the ordinary course, property used in trade or business (subject to depreciation), and real property used in business. By default, real property of a person not engaged in real estate business and not used in business is a capital asset.

B. Transactions Covered

Sales (cash or installment), exchanges, dacion en pago, foreclosures (upon certain events), and other dispositions for consideration.
Involuntary sales (e.g., expropriation): special rule (see §9 below).

Not covered by CGT: donations (donor’s tax), transfers at death (estate tax), ordinary assets in business (regular income tax/VAT regime), and tax-free exchanges that meet strict requisites (see §10).

3) Rate and Tax Base

Rate: 6% (final tax).
Tax base: Higher of the GSP or the FMV at the time of execution.
- FMV = higher of (a) BIR zonal value (if available) or (b) assessor’s market value per latest Tax Declaration.
No deductions for costs, commissions, or improvements—CGT is on gross base (the higher of the two values).

4) Step-by-Step Computation

Determine GSP (per Deed).
Get FMV:
- Retrieve BIR zonal value for the property (land and, where applicable, building).
- Retrieve assessor’s market value (Tax Declaration).
- FMV = higher of the two.
Tax base = max(GSP, FMV).
CGT due = 6% × tax base.

If land and building: The zonal value often applies to land; building commonly uses assessor’s value. The tax base still compares total GSP vs aggregate FMV (land+building) and uses the higher total.

5) Installment Sales

General approach: CGT is still based on the higher of total GSP or FMV determined at the time of sale.
Payment timing: The BIR allows proportionate payment of the 6% in step with collections on qualifying installment sales (the final tax remains 6% of the higher of total GSP or FMV, apportioned pro rata as installments are received).
Practice tip: Make sure the deed and receipts clearly show the installment schedule, down payment, and due dates to match the pro-rata CGT payments.

6) Filing, Deadlines, and Documents (ONETT Process)

CGT Return (BIR Form 1706)

When: Within 30 days from the date of sale/exchange/disposition (for installment sales, the initial return is typically due within 30 days of the deed; subsequent proportional payments follow collections).
Where: Revenue District Office (RDO) where the property is located (ONETT—One-Time Transactions).
How: Electronic filing/payment where applicable, or manual filing if permitted by the RDO’s ONETT workflow.

Documentary Stamp Tax (BIR Form 2000-OT)

Rate: 1.5% of the higher of GSP or FMV for deeds of sale/assignment.
When: On or before the 5th day following the close of the month when the deed was executed.

Other standard requirements (for the CAR—Certificate Authorizing Registration—release):

Original/photocopy of Deed of Absolute Sale (or relevant deed).
TINs of both parties; Buyer must secure TIN if none yet.
Latest Tax Declaration (land & improvements).
Certificate of No Improvement/Certificate of Improvement (if applicable).
Photocopy of transfer certificate of title/condo CCT.
BIR zonal valuation printout (if available).
Proof of payment: CGT (1706), DST (2000-OT), and relevant local taxes (transfer tax).
Valid IDs, SPA/board resolutions/corporate docs if party is a corporation.
Other RDO-specific forms (checklists vary slightly).

After CAR issuance: Proceed to LGU for transfer tax, then Register of Deeds for title transfer, and Assessor for new Tax Declaration.

7) Penalties

Surcharge: 25% (late filing/payment) or 50% (willful neglect/false return).
Interest: Per annum interest at the statutory rate (pegged to BSP rates under the NIRC’s interest provision; administratively treated at 12% p.a. in recent years).
Compromise penalties may apply per BIR schedules.

8) The Principal Residence Exemption (PRE)

Natural persons may be exempt from CGT on the sale of their principal residence if ALL of the following are met:

Seller is an individual (not a corporation or trust).
The property sold is the seller’s principal residence (the dwelling where the taxpayer habitually resides).
The proceeds are fully utilized to acquire or construct a new principal residence within 18 months from the date of sale.
The seller notifies the BIR of intent to avail within 30 days from the sale (formal notice).
Exemption may be availed only once every 10 years.
Any unutilized portion of the proceeds is subject to 6% CGT (computed as if the sale were taxable, multiplied by the ratio of unutilized proceeds to total selling price or FMV, whichever is higher).

DST and local transfer taxes continue to apply even if CGT is exempt under PRE.

9) Sales to the Government / Expropriation

For a sale to the Government or its political subdivisions or agencies (including GOCCs), individual sellers of capital assets generally have an option:

Pay 6% CGT, or
Be taxed under regular income tax rates on the actual gain (i.e., graduated rates, with deductions where applicable).

Choose the option that yields the lower tax (often CGT, but not always—e.g., low or no gain situations).

10) Tax-Free Exchanges and Restructurings (Briefly)

No gain or loss recognized (i.e., not subject to CGT) on qualifying tax-free exchanges (e.g., transfer to a corporation in exchange for stock resulting in control, certain mergers/consolidations), provided the strict statutory conditions are met and documentary requirements are complied with. These rules are technical; missteps can forfeit nonrecognition treatment.

11) Capital vs. Ordinary Asset: Classification Traps

Real estate businesses (dealers, developers, lessors) typically hold ordinary assets. Sales of such property are not subject to 6% CGT but to regular income tax/corporate tax and VAT (if VAT-registered and thresholds met).
Property actually used in business (e.g., office, factory) is an ordinary asset while in use.
Conversion from ordinary to capital asset is not automatic; the BIR looks at books, use, and time elapsed after business cessation. Maintain documentary proof of retirement from business, reclassification entries, and cessation of use.

12) Other Taxes and Costs Typically Seen in a Transfer

Documentary Stamp Tax (DST): 1.5% of the higher of GSP or FMV (see §6).
Local Transfer Tax: LGU-imposed; commonly up to 0.5% of FMV in provinces and up to ~0.75% in cities/MM jurisdictions (rates vary by LGU).
Registration Fees at the Register of Deeds; notarial fees; broker commissions (private cost, not tax).
Withholding: CGT is final and not subject to withholding; however, creditable withholding tax (CWT) applies in ordinary-asset sales (not CGT cases).

13) Corporate Sellers: Snapshot

If a corporation sells land/buildings that are capital assets, the 6% final CGT applies (separate and distinct from corporate income tax on business income).
If the property is an ordinary asset, sale falls under regular corporate income tax (RCIT)/MCIT rules and may be VATable.

14) Special Situations

Foreclosures: The taxable event and who bears the CGT can vary (e.g., on extra-judicial foreclosures, certain rules apply at auction or redemption expiration). Documentation and timing matter.
Exchanges with boot: If a purported tax-free exchange includes cash/boot, partial recognition can trigger tax.
Partial interests/easements: Compute base using higher of GSP or FMV of the interest conveyed; DST/local taxes still apply.
Co-owners/estates: Estates/trusts selling a capital asset are generally within the 6% CGT regime; ensure TINs and estate proceedings documentation are ready.

15) Worked Example (Simple Sale)

Deed price (GSP): ₱5,000,000
BIR zonal value (land): ₱4,600,000
Assessor’s value (building): ₱700,000
FMV total = ₱4,600,000 + ₱700,000 = ₱5,300,000
Tax base = higher of ₱5,000,000 (GSP) and ₱5,300,000 (FMV) = ₱5,300,000
CGT (6%) = ₱318,000
DST (1.5%) = ₱79,500
Local transfer tax (say 0.75% of FMV) ≈ ₱39,750
(Plus registration fees, etc.)

16) Compliance Checklist (Quick)

Identify asset classification (capital vs ordinary).
Gather zonal value and Tax Declaration to fix FMV.
Draft deed; ensure TINs.
Pay CGT (BIR 1706) within 30 days.
Pay DST (BIR 2000-OT) by the 5th day after month-end of execution.
Submit ONETT requirements; obtain CAR.
Pay LGU transfer tax; proceed to Register of Deeds for title transfer.
Update Assessor for new Tax Declaration.

17) Practical Tips and Common Pitfalls

Always compare GSP vs FMV—the higher governs.
Mind the 30-day clock: late filing triggers surcharge + interest.
Principal Residence Exemption: file the notice within 30 days, track the 18-month reinvestment, and document utilization to the centavo.
Installments: Align deed, receipts, and CGT payments with the pro-rata method recognized by the BIR.
Reclassification: If claiming capital-asset status after business cessation, paper the trail (retirement filings, book entries, proof of non-use).
Government sales: Run the numbers—CGT vs graduated rates on actual gain—to pick the lower tax.
Condo sales: Check both unit (building) and pro-indiviso land share values; FMV aggregation still applies.

18) Frequently Asked Questions

Q1: Can I deduct broker’s commission or renovation costs before computing CGT? No. CGT is on gross base (higher of GSP or FMV). Those costs are irrelevant to the CGT base.

Q2: Does CGT apply to vacant lots? Yes, if capital assets. The 6% final tax applies to land whether improved or not.

Q3: I’m a small landlord selling a house I used as a rental. CGT or ordinary? If the property was actually used in business (rented as a business), it is generally an ordinary asset while in use; sale tends to be outside CGT and into regular income tax/VAT rules.

Q4: Can I avail the Principal Residence Exemption for a condo? Yes, if it was your principal residence, you timely notified the BIR, and you fully used the proceeds for a new principal residence within 18 months. Only once every 10 years.

Q5: I sold on installment; must I pay 6% upfront on the entire price? The final tax base is still the higher of total GSP or FMV at sale, but BIR practice allows proportional payment as collections are received. Keep meticulous records.

19) Key Takeaways

6% final CGT applies to sales of land/buildings that are capital assets—base is the higher of GSP or FMV.
Ordinary-asset sales are not CGT; they fall under regular income tax/corporate tax and may be VATable.
Deadlines matter: 30 days for CGT filing; DST by the 5th day after month-end.
Principal Residence Exemption can eliminate CGT if strictly observed.
CAR is mandatory for title transfers—no CAR, no transfer.

Disclaimer

This article provides a general, practitioner-level overview. Edge cases (foreclosures, tax-free exchanges, mixed capital/ordinary components, corporate reorganizations, international aspects) are highly fact-sensitive. For transactions of consequence, consult your tax counsel or adviser to review deeds, schedules, valuations, and filings before signing.