Introduction

In the Philippine legal framework, the transfer of land titles often involves not only the land itself but also any structures or improvements built upon it, such as residential houses, commercial buildings, or other edifices. Capital Gains Tax (CGT) plays a critical role in these transactions, serving as a fiscal mechanism to tax the presumed profit from the disposition of capital assets. Under Philippine tax law, structures are considered integral components of real property, and their inclusion in land title transfers triggers specific CGT implications. This article provides a comprehensive examination of CGT as it applies to structures during land title transfers, drawing from the provisions of the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent laws including Republic Act (RA) No. 10963 (TRAIN Law), RA No. 11534 (CREATE Law), and relevant Bureau of Internal Revenue (BIR) regulations up to the present context.

The discussion covers the legal basis, scope of application, computation methods, exemptions, procedural requirements, potential pitfalls, and recent developments. Understanding these elements is essential for property owners, buyers, legal practitioners, and tax professionals to ensure compliance and optimize tax outcomes during property transfers.

Legal Basis and Definition of Key Terms

The imposition of CGT on structures during land title transfers is primarily governed by Section 24(D) of the NIRC for individual taxpayers and Section 27(D)(5) for corporate entities. CGT is a final tax levied on the sale, exchange, or other disposition of real property classified as a capital asset, at a rate of 6% based on the gross selling price or the fair market value (FMV), whichever is higher.

Key Definitions

Real Property as Capital Asset: Under Section 39(A) of the NIRC, real property includes land, buildings, and improvements that are not held primarily for sale to customers in the ordinary course of trade or business. Structures such as houses, apartments, warehouses, or factories qualify as capital assets unless they form part of inventory in a real estate business.
Structures: These refer to any permanent or semi-permanent improvements affixed to the land, including buildings, fences, roads, or other enhancements that increase the property's value. Philippine jurisprudence, such as in Commissioner of Internal Revenue v. Cebu Portland Cement Co. (G.R. No. L-41383, 1987), affirms that structures are inseparable from the land for tax purposes unless explicitly treated otherwise in the deed of sale.
Land Title Transfer: This encompasses the process of conveying ownership via sale, donation, inheritance, or other modes, culminating in the registration of a new Certificate of Title with the Registry of Deeds (RD) under Presidential Decree (PD) No. 1529 (Property Registration Decree). The transfer requires clearance from the BIR confirming payment of CGT and other taxes.

CGT applies uniformly to the entire real property, including structures, unless the transaction segregates the land and structures for valuation purposes—a rare but permissible practice under BIR Revenue Memorandum Order (RMO) No. 15-2003.

Scope of Application to Structures

CGT on structures arises when the land and its improvements are transferred together, which is the norm in most transactions. The tax is not imposed separately on the structure but on the composite value of the property. However, certain scenarios warrant special consideration:

Integrated Sale of Land and Structure: In a standard sale, the selling price covers both land and building. The BIR uses the higher of the contract price, zonal value (from the Department of Finance), or assessed value (from the local assessor) to compute CGT. For instance, if a residential lot with a house is sold for PHP 5 million, but the FMV is PHP 6 million (PHP 4 million for land + PHP 2 million for structure), CGT is 6% of PHP 6 million.
Separate Valuation of Structures: If the deed of sale explicitly allocates values between land and structure (e.g., PHP 3 million for land and PHP 2 million for building), the BIR may accept this for CGT computation, provided it aligns with FMV. This is common in commercial properties where structures depreciate. BIR Ruling No. DA-489-03 clarifies that depreciated book value can be used for structures if supported by appraisal reports.
Transfers Without Monetary Consideration: In donations or inheritances, CGT is based on FMV at the time of transfer. For structures, this includes replacement cost less depreciation, as per BIR guidelines.
Foreclosures and Judicial Sales: In cases under RA No. 3135 (An Act to Regulate the Sale of Property Under Special Powers Inserted in or Annexed to Real-Estate Mortgages), CGT applies to the bid price or FMV, including structures.

Structures used in trade or business (ordinary assets) are exempt from CGT but subject to regular income tax on actual gains under Section 32(A) of the NIRC.

Computation of Capital Gains Tax

The formula for CGT is straightforward: CGT = 6% × Tax Base, where the tax base is the higher of:

Gross Selling Price (GSP): The total consideration received, including cash, installments, or assumed liabilities.
Fair Market Value (FMV): Determined by the BIR zonal value for land and local assessor's value for structures, or an independent appraisal if contested.

Special Considerations for Structures

Depreciation Adjustment: For structures, FMV accounts for physical depreciation. Under Revenue Regulations (RR) No. 2-98, depreciation rates follow the straight-line method (e.g., 2-5% annually for residential buildings). If a structure is 10 years old with a original cost of PHP 10 million and 3% depreciation rate, its depreciated value is PHP 7 million, influencing the overall FMV.
Installment Sales: If payment is in installments, CGT is prorated based on collections, but structures' value must be allocated proportionally (RR No. 5-2001).
Exchange of Properties: In barter or exchange, CGT is computed on the difference in FMV, including structures' appraised values.
Value-Added Tax (VAT) Interaction: If the seller is VAT-registered and the property is an ordinary asset, VAT (12%) applies instead of CGT, but structures' classification must be verified.

Example: A landowner sells a farm lot with a barn (structure) for PHP 8 million. Zonal value for land: PHP 6 million; assessed value for barn: PHP 3 million. Tax base = PHP 9 million (higher FMV). CGT = PHP 540,000.

Exemptions and Relief Measures

Several exemptions mitigate CGT liability on structures during title transfers:

Principal Residence Exemption: Under Section 24(D)(2) of the NIRC, as amended by the TRAIN Law, sale of a principal residence (including structure) is exempt if proceeds are used to acquire a new residence within 18 months. The exemption covers up to PHP 2.5 million (adjusted for inflation), with excess subject to CGT. BIR certification via Certificate Authorizing Registration (CAR) is required.
Exchanges for Shares or Government Projects: Tax-free under Section 40(C)(2) for corporate reorganizations or RA No. 10083 for infrastructure projects.
Senior Citizens and PWDs: Partial exemptions under RA No. 9994 and RA No. 10754, reducing CGT on residential structures.
Agricultural Land Reforms: Exempt under the Comprehensive Agrarian Reform Law (RA No. 6657) if structures are incidental to farmland.

Non-residents may face higher rates or withholding, but structures follow the same rules.

Procedural Requirements During Land Title Transfer

Title transfer cannot proceed without BIR clearance. Key steps include:

Filing and Payment: Seller files BIR Form 1706 (CGT Return) within 30 days of notarization, paying at an Authorized Agent Bank.
Document Submission: Deed of Sale, Tax Declaration (separating land and structure values if applicable), and appraisal for structures.
Issuance of CAR and eCAR: BIR issues Electronic Certificate Authorizing Registration (eCAR) upon payment, required by RD for title issuance.
Withholding Tax: Buyer withholds 6% creditable withholding tax (CWT) if seller is habitually engaged in real estate, but standard CGT applies otherwise.

Delays in processing can occur if structure valuations are disputed, requiring appeals to the BIR Regional Director.

Potential Pitfalls and Compliance Issues

Common challenges include:

Undervaluation: Declaring a low price for structures to minimize tax can lead to assessments and penalties (50% surcharge + interest).
Misclassification: Treating business structures as capital assets invites audits.
Installment Defaults: Failure to report collections triggers full CGT upfront.
International Aspects: For non-resident aliens, CGT is 6% on GSP, but treaties may apply.

Penalties under Section 248-255 of the NIRC range from 25-50% surcharges to criminal liability for evasion.

Recent Developments and Future Outlook

Post-TRAIN and CREATE Laws, CGT remains at 6%, but proposals in Congress (as of 2025) aim to index rates to inflation and introduce green incentives for sustainable structures. BIR's digitalization, including the eBIRForms system, has streamlined filings, reducing processing time for structure-inclusive transfers. Supreme Court decisions, like CIR v. Primetown Property Group, Inc. (G.R. No. 162155, 2007), continue to refine FMV determinations for depreciable structures.

In conclusion, CGT on structures during land title transfers ensures equitable taxation while accommodating property dynamics. Stakeholders must consult updated BIR issuances and seek professional advice to navigate complexities effectively.