I. Overview

In the Philippines, the sale of a principal residence by an individual is ordinarily subject to 6% capital gains tax (CGT) on the higher of:

The gross selling price stated in the deed of sale, or
The fair market value (FMV) as determined by the BIR or local assessor.

However, the National Internal Revenue Code (NIRC) allows an exemption from CGT when an individual sells his/her principal residence and reinvests the proceeds in a new principal residence within a specified period, subject to strict conditions.

This article focuses on a practical but often confusing question:

What is the effect on the buyer if the seller claims CGT exemption on the sale of the principal residence?

We will first outline the legal basis of the exemption, then walk through the process and finally examine the buyer’s risks, protections, and best practices.

II. Legal Basis of CGT on Principal Residence

Who is subject to CGT?
- Individuals (citizens, resident aliens, non-resident aliens engaged in trade or business) selling real property classified as a capital asset located in the Philippines.
- Capital asset: generally, real property not used in trade, business, or profession (e.g., family home, personal residence), as opposed to ordinary assets (e.g., real property held for sale by real estate dealers, property used in business).
6% Final CGT
- Imposed on the gross selling price or FMV, whichever is higher.
- Final tax: once paid, it is not included again in computing income tax.
Principal Residence Exemption Under the NIRC, an individual seller may be exempt from CGT on the sale of his/her principal residence, provided that certain substantive and procedural requirements are complied with (see Section III).
Who can’t avail?
- Corporations, partnerships, and other juridical entities cannot claim the principal residence CGT exemption.
- Individuals selling ordinary assets (e.g., a property used as an office or rental property) also cannot claim this specific exemption.

III. Conditions for CGT Exemption on Sale of Principal Residence

While the exact wording is found in the Tax Code and implementing revenue regulations, the key conditions are:

Seller must be an individual
- The exemption is personal to an individual taxpayer.
- Not available to corporations, partnerships, or estates as sellers.
Property must be the seller’s principal residence
- It must be the main home where the seller and/or the seller’s family normally lives. BIR typically looks at:
- Address used in government IDs, tax returns, and official correspondence.
- Utility bills, barangay certificates, or other proof of actual residence.
Reinvestment of proceeds in a new principal residence
- The proceeds (selling price) from the sale must be fully or partly utilized in acquiring or constructing a new principal residence within a specific period (commonly 18 months from the date of sale).
- If 100% of the proceeds is reinvested, entire gain may be exempt.
- If only a portion is reinvested, the unutilized portion is subject to 6% CGT on a pro rata basis.
One-time use within a given period
- The exemption can typically be availed of only once within a certain number of years (commonly ten years).
- The BIR monitors this through prior returns and rulings.
Carry-over of historical cost
- The cost basis of the old principal residence is carried over to the new principal residence, preventing the taxpayer from “resetting” the basis and avoiding tax permanently on the gains.
Mandatory BIR Notification and Documentation
- Seller must notify the BIR within a specified period (e.g., 30 days from sale) of his/her intention to avail of the exemption.
- Special forms and supporting documents (e.g., proof of occupancy, TIN, tax declaration) must be filed.
- Ultimately, BIR issues a Certificate Authorizing Registration (CAR) indicating that the sale is CGT-exempt, either fully or partially.

Important: The exemption is not automatic. It must be formally claimed and approved by BIR. Until then, from the government’s perspective, the default rule is that the sale is CGT-able.

IV. Ordinary Process vs. Exemption Process

A. Ordinary Sale (No Exemption Claimed)

Typical tax flow on a capital asset sale by an individual:

Seller files BIR Form 1706 (CGT) and pays the 6% CGT.
Seller/buyer pays:
- Documentary Stamp Tax (DST)
- Local transfer tax (city/municipal)
- Registration fees at the Registry of Deeds
BIR issues a CAR, which is needed for:
- Transfer of title at the Registry of Deeds
- Issuance of new tax declaration in buyer’s name

Here, the buyer’s main risk is if the seller fails to pay CGT or DST, the CAR will not be issued, preventing transfer of title.

B. Sale with Claimed Principal Residence Exemption

When the seller claims CGT exemption:

Instead of paying CGT, the seller files an application with the BIR indicating:
- Intention to avail of principal residence exemption
- Proof that the property is indeed the principal residence
- Undertaking to reinvest proceeds in a new principal residence within the required period
BIR verifies documents and may require:
- Additional proof of actual occupancy
- Documents showing planned purchase/construction of new residence
BIR may:
- Issue a CAR reflecting CGT exemption (often after sufficient proof of compliance), or
- Require subsequent submission of proof of reinvestment (e.g., deed of sale of new residence, proof of payments), and potentially assess CGT later for any unutilized portion.
DST, local transfer tax, and registration fees
- Buyer’s side taxes/fees (DST, local transfer tax) remain due regardless of whether the seller is CGT-exempt.
- CAR issuance will also depend on payment of these taxes, not just CGT.

V. Effect on Buyer: Key Legal and Practical Consequences

Now we come to the heart of the topic: How does the seller’s claim of CGT exemption affect the buyer?

1. Who is legally liable for CGT?

As a matter of law, the capital gains tax is imposed on the seller, not the buyer.
The buyer is not the taxpayer for CGT, and has no statutory obligation to pay or withhold CGT for the seller (unlike certain withholding taxes).

However, in actual transactions, contracts often provide that the buyer shoulders the CGT as part of the negotiation. That is purely a contractual arrangement between the parties and does not change who the government can legally assess.

Therefore, the seller’s claim of CGT exemption does not, by itself, change the legal tax liability of the buyer. The buyer remains not liable for CGT in the eyes of the BIR, unless specific unusual circumstances (like fraud or collusion) are present.

2. Impact on Issuance of CAR and Transfer of Title

Where the buyer is most affected is in the processing and timing of the CAR and, consequently, the transfer of title.

The Registry of Deeds will not transfer title without a CAR from the BIR.
If the seller’s application for CGT exemption is delayed, denied, or questioned, the CAR may be delayed or even withheld until the matter is settled.

Implications for the buyer:

Delay in title transfer
- Even if the buyer has fully paid the purchase price and taken possession, the title remains in the seller’s name until the CAR is issued and the buyer’s title is registered.
- This delays:
  - Ability to mortgage the property
  - Ability to resell
  - Full security of ownership
Risk exposures during the delay While the title is still in the seller’s name:
- Seller’s creditors may try to levy on the property.
- Complications may arise if the seller dies or becomes incapacitated.
- BIR can pursue the seller for taxes, and under certain circumstances, tax liens may affect properties still in the seller’s name.
If exemption is denied or partially allowed
- BIR may assess 6% CGT plus interest and penalties from date of sale on the portion not properly exempt.
- Until the liability is paid or resolved, BIR may refuse to issue the CAR, again stalling transfer of title to the buyer.

3. Risk that Buyer Becomes Indirectly “On the Hook”

Legally, the buyer should not be held liable for the seller’s CGT. But in practice, the buyer may be forced to step in:

To avoid further delay, the buyer may agree to pay or advance the CGT (even though it is the seller’s tax) just to get the CAR and proceed with title transfer.
If the contract states “CGT for the account of Seller,” but the seller is unavailable, uncooperative, or insolvent, the buyer may have no practical remedy except to pay, then pursue a separate legal claim against the seller for reimbursement.

In short, while the law targets the seller, the buyer can suffer the consequences through:

Delayed CAR
Delayed title transfer
Indirect financial burden (if buyer chooses to pay CGT to “solve the problem”).

4. BIR’s Recourse When Conditions Are Not Met

If the seller:

Fails to notify BIR properly, or
Does not reinvest proceeds in accordance with the rules, or
Misrepresents the property as a principal residence when it is not,

BIR may:

Treat the sale as a regular CGT transaction, assessing:
- 6% CGT on the proper tax base
- Interest and penalties from the date the tax should have been paid.
Issue an assessment against the seller, and possibly file collection actions.

In most cases:

The buyer’s valid title, once registered, is not automatically voided merely because the seller failed to comply with tax conditions.
But if no CAR has yet been issued and the title is still in the seller’s name, the buyer remains in a precarious position until the tax issue is resolved.

VI. Practical Considerations and Due Diligence for Buyers

Given the risks, buyers should treat a seller’s plan to claim CGT exemption with caution and proper structuring, not merely trust that “BIR will approve.”

1. Contractual Clauses to Protect the Buyer

Some useful provisions in the Deed of Sale or Contract to Sell:

Tax Allocation Clause
- Clearly state which party shoulders which taxes:
  - “Capital Gains Tax shall be for the account of the Seller.”
  - “Documentary Stamp Tax, transfer tax, registration fees shall be for the account of the Buyer.”
Representation and Warranty on Eligibility
- Seller declares that:
  - The property is his/her principal residence.
  - He/she has not previously availed of the principal residence exemption within the prescribed period.
  - He/she intends to comply with all BIR requirements for exemption.
Condition Precedent / Undertaking Clause
- Provide that:
  - If BIR denies the CGT exemption or assesses any CGT, the Seller remains liable and must pay such taxes, including interest and penalties.
  - Failure of the seller to pay CGT within a fixed period authorizes the buyer to:
    - Pay CGT on behalf of seller, set off against any unpaid balance, or
    - Treat it as a breach and pursue appropriate remedies.
Escrow / Holdback Arrangement
- A portion of the purchase price may be held in escrow or retained by the buyer (or a third party) to cover potential CGT liability, pending BIR’s final action on the exemption.
- If exemption is granted and confirmed, the balance is released to seller. If not, funds are used to pay the CGT.

2. Due Diligence Steps

Before agreeing to rely on the seller’s CGT exemption:

Verify property’s use
- Ask for proof that the property is indeed the seller’s principal residence (IDs, bills, barangay certification, etc.).
Check seller’s tax history (as far as possible)
- Inquire whether seller has previously availed of the principal residence CGT exemption in the last 10 years.
Assess the timeline
- Understand that BIR processing of exemption/ CAR can take time.
- Align this with your need for prompt title transfer (e.g., if you need the property as collateral soon).
Engage a tax or legal professional
- Especially for high-value properties or complex situations (co-ownership, multiple heirs, etc.), professional advice can help structure the transaction safely.

VII. Special Situations

1. Sale Between Relatives

The fact that buyer is a relative (e.g., child buying from parent) does not automatically affect the seller’s eligibility for CGT exemption, but:
- BIR may scrutinize the transaction more closely for under-declaration of selling price.
- Separate donor’s tax issues may arise if the price is grossly below FMV.

For the buyer, the same risks apply: CAR is crucial, and under-declaration may lead to later assessments.

2. Co-owned Principal Residence

If husband and wife or siblings co-own the property:
- All co-owners who are individuals may need to participate in the exemption claim.
- Allocation of proceeds and reinvestment among them can complicate the analysis.

As buyer, ensure the deed is properly executed by all registered owners and that all of them comply with BIR requirements.

3. Installment Sales

If payment is staggered:
- Parties must be clear when the “date of sale” is considered to occur (usually upon execution of an absolute deed of sale).
- The 18-month reinvestment period typically runs from date of sale, not from final payment.
- For the buyer, the possibility of delayed CAR becomes even more sensitive.

VIII. Common Misconceptions

“If the seller claims exemption, the buyer pays no taxes.” False. The buyer still has to shoulder taxes/fees allocated to him or her (DST, local transfer tax, registration fees, etc.) under law or the contract.
“BIR cannot block title transfer once deed of sale is notarized.” False. The Registry of Deeds will not transfer title without the CAR, and BIR will not issue the CAR if tax issues (including a disputed exemption) remain unresolved.
“CGT exemption is automatic for any family home sale.” False. It is optional, conditional, and requires proof. Many claims are denied for non-compliance or incomplete documentation.
“Once title is transferred, buyer is safe from all tax issues related to the sale.” Not entirely. While the buyer is not the taxpayer for CGT, under-declaration or fraud could lead to investigation and complications. Moreover, if title is not yet transferred, the buyer is definitely exposed.

IX. Practical Takeaways for Buyers

Remember the principle:
- CGT is a tax on the seller, not on the buyer.
- The seller’s CGT exemption status does not legally convert the buyer into the taxpayer.
But also remember the reality:
- Without a CAR, the buyer cannot register the property.
- A problematic CGT exemption claim by the seller can delay or obstruct the buyer’s title.
Protect yourself by contract:
- Clearly allocate tax burdens.
- Require undertakings that the seller will pay CGT if the exemption fails.
- Consider escrow/holdback mechanisms.
Don’t rely on verbal assurances:
- “Don’t worry, principal residence ’yan, exempt ’yan sa CGT” is not enough.
- What matters is BIR’s approval and the CAR.
When in doubt, risk-manage instead of blind trust:
- Sometimes, the more practical solution is not to rely on the exemption claim at all and simply have the seller pay the 6% CGT (even if you shoulder it by agreement), especially for transactions where speed and certainty of transfer are more valuable than potential CGT savings.

X. Conclusion

The principal residence CGT exemption under Philippine tax law is a valuable tax benefit for individual homeowners, but it is highly technical and strictly conditioned. For the buyer, the seller’s decision to claim this exemption:

Does not make the buyer the taxpayer,
But can significantly affect the timing, certainty, and cost of transferring full legal title.

A buyer should therefore treat a seller’s CGT exemption claim as a red-flag for careful structuring, not as a mere side note. Through clear contractual provisions, proper due diligence, and, where needed, professional advice, buyers can minimize the risk that a failed or delayed CGT exemption ends up jeopardizing their rights or forcing them to pay someone else’s tax just to get the title they paid for.