In the Philippines, the determination of whether inherited property is classified as Exclusive or Community/Conjugal is a critical step in computing the net estate of a decedent. This classification dictates whether the full value of the property is taxed against the decedent's estate or if only a portion is included, with the remainder belonging to the surviving spouse.
Under the National Internal Revenue Code (NIRC), as amended by the TRAIN Law (Republic Act No. 10963), the rules for classification depend heavily on the applicable property regime of the spouses at the time of the decedent's death.
I. The Impact of Property Regimes
The classification of inherited property is governed by the Family Code of the Philippines. Unless a marriage settlement (pre-nuptial agreement) was executed, the date of the marriage determines the default regime:
| Marriage Date | Default Property Regime |
|---|---|
| Before August 3, 1988 | Conjugal Partnership of Gains (CPG) |
| On or After August 3, 1988 | Absolute Community of Property (ACP) |
II. Inherited Property under Absolute Community (ACP)
Under ACP, the general rule is that all property owned by the spouses at the time of the celebration of the marriage or acquired thereafter is considered community property. However, there is a specific exception for inherited assets.
- The General Rule (Exclusive): Property acquired during the marriage by gratuitous title (inheritance or donation), as well as the fruits and income thereof, is classified as Exclusive Property of the recipient spouse.
- The Exception: If the donor, testator, or ancestor expressly provides that the inherited property shall form part of the community property, it loses its exclusive status.
- Estate Tax Treatment: If the decedent inherited property during the marriage under ACP, it is generally listed as Exclusive Property in the estate tax return.
III. Inherited Property under Conjugal Partnership of Gains (CPG)
Under CPG, the "fruits" of labor and the income from separate properties are joined, but the ownership of the properties themselves remains distinct based on the mode of acquisition.
- The Rule (Exclusive): Property acquired during the marriage by gratuitous title (inheritance) is strictly Exclusive Property of the spouse who inherited it.
- The Treatment of Fruits: Unlike ACP, the income, fruits, or interests accruing from that inherited property during the marriage are considered Conjugal Property.
- Estate Tax Treatment: The principal value of the inherited property is included in the decedent’s Exclusive Estate. However, any rent, interest, or "fruits" that accrued from that property up to the date of death are halved, with 50% being included in the taxable estate as the decedent's share in the conjugal partnership.
IV. Property Inherited Before Marriage
The classification also changes based on when the property was acquired relative to the marriage ceremony:
- Under ACP: Property brought into the marriage that was inherited before the wedding generally becomes Community Property, unless the spouse has legitimate descendants from a prior marriage. In that specific case, the property remains exclusive to protect the first family's inheritance.
- Under CPG: Property inherited before the marriage remains Exclusive Property of the spouse.
V. Vanishing Deduction (Property Previously Taxed)
The classification of inherited property is also central to the Vanishing Deduction. This is a tax relief provided when the same property is taxed twice within a short period (5 years) due to successive deaths.
To claim this deduction, the property must be identified as having been received by the decedent by inheritance (or gift) from a prior decedent. The deduction percentage "vanishes" over time:
- 100%: If the prior decedent died within 1 year prior to the current decedent.
- 80%: If more than 1 year but not more than 2 years.
- 60%: If more than 2 years but not more than 3 years.
- 40%: If more than 3 years but not more than 4 years.
- 20%: If more than 4 years but not more than 5 years.
Note: The property must have been part of the gross estate of the prior decedent situated in the Philippines, and the estate tax must have been paid.
VI. Summary of Classification for Computation
When preparing the Estate Tax Return (BIR Form 1801), the classification determines where the asset is encoded:
- Exclusive Properties: These are added in full to the gross estate. This includes property owned before marriage (under CPG) and property inherited during marriage (under both CPG and ACP).
- Conjugal/Community Properties: Only the decedent's one-half (1/2) share of these properties is ultimately taxed, though the full value is initially declared to allow for the deduction of the surviving spouse's share.
Proper classification ensures that the estate does not overpay by including the surviving spouse's separate interest, while also ensuring compliance with the Civil Code and Family Code provisions that ground Philippine tax law.