I. Introduction

In the Philippines, transferring property—especially real property—within the family or to third parties is usually done either through:

a Deed of Sale, or
a Deed of Donation.

From a civil law viewpoint, the choice affects ownership, legitime, and potential disputes. From a tax perspective, the choice determines which taxes apply, how much is payable, who pays, and when.

This article focuses on the tax implications of these two modes of transfer under Philippine law, especially after the TRAIN Law reforms, and is written with particular emphasis on real property (land and buildings), while also touching on other properties (cash, shares, movables).

II. Legal and Tax Framework

A. Basic Legal Characterization

Deed of Sale
- A contract whereby one party transfers ownership for a price in money or its equivalent.
- There is consideration (payment of the price).
- Typically used for arm’s length transfers, even between relatives.
Deed of Donation
- An act of liberality where one person disposes gratuitously of a thing or right in favor of another who accepts it.
- No valuable consideration; the cause is liberality.
- Common in intra-family transfers (e.g., parents to children).

The tax regime hinges heavily on whether the transfer is onerous (for value) or gratuitous (by liberality).

III. Taxes Commonly Involved in Property Transfers

When comparing deeds of sale and donation, the main taxes and charges to consider are:

National Internal Revenue Taxes
- Capital Gains Tax (CGT) or Income Tax (for sales)
- Donor’s Tax (for donations)
- Documentary Stamp Tax (DST) (often on instruments of sale; potentially other instruments depending on the document)
- Withholding Taxes (for certain sales, especially of ordinary assets)
Local Taxes and Fees
- Local Transfer Tax (a local tax imposed on the transfer of real property)
- Real Property Tax (RPT) arrears, if any
- Registration fees with the Registry of Deeds
- Notarial fees (not a tax, but a cost)
Future Taxes
- Estate Tax implications (how the transfer affects the taxable estate of the transferor)
- Future CGT or income tax when the donee or buyer later sells the property

IV. Taxation of a Deed of Sale

A. Capital Gains Tax (CGT) on Real Property Classified as Capital Asset

For individuals, and for certain corporations, the sale of real property located in the Philippines classified as a “capital asset” is generally subject to 6% Capital Gains Tax, computed on the higher of:

the gross selling price (as stated in the deed),
the zonal value (BIR’s valuation), or
the fair market value per the local assessor.

Key points:

CGT is final—it substitutes for regular income tax on that sale.
Applicable mainly if:
- the seller is an individual (not habitually engaged in real estate business), or
- the property is a capital asset of a corporation (not held as inventory/ordinary asset).

B. When CGT Does Not Apply: Ordinary Assets

If the real property is an ordinary asset (e.g., held by a real estate dealer/developer, or used in trade or business in certain cases), the sale is not subject to CGT but to:

Regular income tax (graduated rates for individuals or corporate income tax for corporations); and
Creditably Withheld Tax (CWT) at applicable rates, which the buyer may be required to withhold and remit.

C. Documentary Stamp Tax (DST) on Deed of Sale of Real Property

A Deed of Absolute Sale (or similar conveyance for consideration) of real property is subject to Documentary Stamp Tax.

DST is computed on the consideration or fair market value, whichever is higher.
The rate is effectively about 1.5% of that higher value (computed in brackets of ₱1,000).

This is a separate tax from CGT or income tax.

D. Local Transfer Tax

Local government units impose a transfer tax on the sale of real property located within their jurisdiction, usually calculated as a percentage of:

the selling price,
the fair market value, or
the zonal value,

whichever is highest, subject to ceilings under the Local Government Code (typically in the neighborhood of up to around 0.5%–0.75%, depending on whether it’s a province or a highly urbanized city/Metro Manila).

Payment of local transfer tax is usually a prerequisite to registration of the transfer with the Registry of Deeds.

E. Other Costs

Registration fees with the Registry of Deeds (schedule-based).
Notarial fees.
Possible real property tax arrears must often be settled before transfer.

F. Filing and Payment Deadlines (Typical Practice)

CGT return: commonly due within 30 days from the date of sale, with the tax paid upon filing.
DST return: typically due within a short period after the end of the month when the document was executed (often 5 days after the close of the month).
Local transfer tax: within the period prescribed by the LGU, often prior to registration of the deed.

V. Taxation of a Deed of Donation

A. Donor’s Tax Under the TRAIN Law

Under the current regime (after the TRAIN Law):

There is now a single donor’s tax rate of 6%.
It applies to the net gifts made during the calendar year in excess of ₱250,000.

Net gifts = total value of gifts within the calendar year minus allowable deductions and exemptions.

Who is liable? The donor (the person giving the property) is primarily liable for donor’s tax.

B. Tax Base for Donor’s Tax

For real property, the donor’s tax base is the fair market value of the property at the time of donation, usually the higher of:

BIR’s zonal value, or
Assessor’s fair market value.

For other property:

Cash: the amount donated.
Shares of stock: par value for par shares; book value or fair value for non-par or unlisted shares; last traded price for listed shares.

C. Annual Exemption

Each calendar year, the first ₱250,000 worth of net gifts by a donor is exempt from donor’s tax. Above that, flat 6% applies.

The exemption is per donor per year, not per donee.

D. Exempt Donations

Certain donations are exempt from donor’s tax, such as:

Donations to the national government, its agencies, or political subdivisions.
Donations to certain accredited non-stock, non-profit, or charitable organizations, educational institutions, etc., subject to qualifications.
Some intra-family transfers may qualify as part of estate planning or for special reliefs, but as a rule, donations between individuals (e.g., parent to child) are taxable unless they fall under specific exemptions.

(Exact exemptions must always be checked in the current Tax Code and implementing regulations.)

E. Documentary Stamp Tax on Donation

Whether DST applies depends on the specific instrument and the type of property:

Real property donation: the key question is whether the document is one of those specifically subjected to DST (e.g., deeds of sale or conveyances for a consideration). A pure donation (no consideration) is not a “sale” but the practice and interpretation can be nuanced. Some practitioners treat Deeds of Donation of real property as not subject to the DST on deeds of sale, but other DST provisions may be considered depending on the exact wording and structure.
Shares of stock donation: there may be DST on the certificate of shares or transfer, separate from donor’s tax, because certificates and share transfers are often specifically covered by DST.

In practice, one must examine which DST provision applies to the exact document used.

F. Local Transfer Tax on Donation of Real Property

Local transfer tax usually applies to any transfer of ownership of real property, whether:

by sale,
by donation, or
by other modes (e.g., barter, dacion en pago).

Thus, even if the transfer is by Deed of Donation, the donee or donor (depending on local practice) is typically required to pay local transfer tax, again based on the higher of selling price (if any), fair market value, or zonal value, subject to LGU rates.

G. Filing and Payment Deadlines

Donor’s tax return is generally required to be filed and paid within 30 days from the date of donation.
DST (if applicable) follows the general DST filing rules.
Local transfer tax is ordinarily paid before the deed is registered with the Registry of Deeds.

VI. Comparative Analysis: Deed of Sale vs Deed of Donation (Tax Perspective)

A. Main National Tax: CGT vs Donor’s Tax

Deed of Sale
- Main national tax: 6% CGT on gross value (higher of selling price or FMV/zonal) – or regular income tax/CWT if ordinary asset.
- CGT is based on full value, with no threshold exemption.
Deed of Donation
- Main national tax: 6% Donor’s Tax on net gifts in excess of ₱250,000 per calendar year.
- The first ₱250,000 of cumulative net gifts per year is exempt.
- Tax base is fair market value at time of donation (usually higher of zonal or assessed value).

Implication: For low- to moderate-value transfers in a given year, a Deed of Donation can result in lower national tax than a Deed of Sale, because of the ₱250,000 yearly exemption and the fact that donor’s tax is on net gifts rather than “per property” in isolation.

B. Documentary Stamp Tax

Sale of real property for consideration: DST clearly applies, effectively around 1.5% of the higher of selling price, zonal value, or FMV.
Donation of real property: DST exposure is more nuanced; the deed may not fall squarely under “deeds of sale or conveyances for a consideration.” However, other DST provisions may still be triggered depending on how the document is structured.

In practice, the DST burden is typically clearer and heavier on sales.

C. Local Transfer Tax

Both sale and donation of real property usually trigger local transfer tax, since LGUs tax the transfer of ownership, not just sales.
Rate and computation basis (usually higher of price or FMV/zonal) are often similar regardless of mode.

Thus, local tax is not usually avoided simply by using a donation instead of a sale.

D. Who Bears the Tax?

Deed of Sale
- CGT is legally imposed on the seller (though parties can reallocate costs contractually).
- DST is often shared or allocated by agreement.
- Local transfer tax is frequently shouldered by the buyer, but this is negotiable.
Deed of Donation
- Donor’s tax is on the donor.
- Local transfer tax is often allocated to the donee, but may be agreed otherwise.
- DST (if any) depends on how parties allocate it.

From a planning standpoint, who is capable of paying the tax (donor vs donee, seller vs buyer) can influence the chosen mode of transfer.

E. Effect on Future Taxes

If Property Is Donated
- The donee’s acquisition cost is typically the value at which donor’s tax was computed (fair market value at donation).
- When the donee later sells the property:
  - If it is a capital asset, the CGT base will be the higher of selling price or FMV at the time of sale, irrespective of original donor’s tax base.
- For estate planning, donating during lifetime reduces the donor’s property at death and thus may reduce the eventual estate tax base.
If Property Is Sold
- The buyer’s acquisition cost is the purchase price (or sometimes the value recognized for tax purposes).
- Upon later sale, CGT will again be based on the higher of selling price or FMV at that time.
- The seller’s estate is affected because the property is removed from his patrimony in exchange for cash (which will still be part of the estate, unless also spent or transferred).

F. Simulation Risks (Donation Disguised as Sale, or Vice Versa)

Sometimes parties execute a Deed of Sale but no real consideration is paid (or the price is grossly inadequate) to avoid donor’s tax and rely instead on CGT. Conversely, some might label as donation what is actually an onerous transfer.

Risks:

The BIR or a court may recharacterize the transaction based on its true nature, not the label on the document.
A sham sale (no real consideration, or clearly simulated) may be treated as a donation, exposing the parties to donor’s tax, surcharges, and interest.
A “donation” that is in fact a bargain sale or onerous transaction may be treated differently for income tax purposes.

For this reason, the label of the deed must align with the actual intent and facts.

VII. Illustrative Comparisons

Scenario 1: Parent Transfers Property Worth ₱2,000,000 to Child

Assume real property (capital asset), FMV/zonal = ₱2,000,000.

Option A: Deed of Sale (Nominal or Low Price)

Assume selling price = ₱1,000,000, but BIR uses ₱2,000,000 (higher of selling price or FMV).
CGT: 6% of ₱2,000,000 = ₱120,000.
DST: about 1.5% of ₱2,000,000 ≈ ₱30,000.
Local transfer tax: say up to around 0.5–0.75% of value (for illustration, approx ₱10,000–₱15,000).
Total national taxes (ignoring local and fees): ≈ ₱150,000 (CGT + DST).

Option B: Deed of Donation

Value for donor’s tax: ₱2,000,000 (FMV).
Assume no other gifts given that year.
Net gifts: ₱2,000,000 – ₱250,000 exemption = ₱1,750,000.
Donor’s tax (6%): 6% of ₱1,750,000 = ₱105,000.
Add local transfer tax (similar range as sale), and any DST implications if applicable.

From a strict national tax comparison (ignoring nuances of DST on donation and local taxes):

Sale route: CGT + DST ≈ ₱150,000
Donation route: Donor’s tax ≈ ₱105,000

So, donation is cheaper in this stylized scenario.

Scenario 2: Small Transfer (₱200,000 Market Value)

Net gift of ₱200,000 is within the ₱250,000 annual exemption.
Donor’s tax: ₀ (assuming no other gifts that year).
A sale at ₱200,000 would still trigger:
- CGT: 6% of higher of price or FMV,
- DST, and
- local transfer tax.

Here, the tax advantage of a donation is stark (no donor’s tax vs CGT + DST on sale), subject to local transfer tax and costs still applying.

VIII. Non-Tax Considerations That Indirectly Affect Tax Planning

While this article emphasizes taxes, it’s important to recognize civil law and practical issues that might override pure tax savings:

Legitime and Compulsory Heirs
- Donations that impair legitime can be subject to reduction (collation) and future disputes.
- Overly aggressive donations may prompt challenges by other heirs.
Control and Use
- A donor might want to retain control or usufruct (e.g., parents staying in the family home), which may require more careful structuring (reservation of usufruct, donation subject to conditions, etc.).
Future Estate Planning
- Donating too early may deprive the donor of property needed for maintenance or emergencies.
- A balanced estate plan may mix lifetime donations with transfers upon death.
Documentation and Proof
- Donation must be accepted, and for real property, must generally be in a public instrument and registered.
- Sales must be supported by proof of payment if challenged.

These can influence whether using a donation (even if tax-cheaper) is truly appropriate.

IX. Compliance, Penalties, and Practical Tips

A. Penalties for Late or Non-Payment

Both donor’s tax and CGT/DST are subject to:

Surcharge (for late filing/payment or fraud),
Interest (per annum on unpaid tax),
Compromise penalties.

Failing to comply can easily erase any tax savings achieved by a particular mode of transfer.

B. Practical Tips for Choosing Between Deed of Sale and Deed of Donation

For Intra-Family Transfers (Parent to Children, etc.):
- For small to moderate property values, a Deed of Donation often yields lower national taxes due to the ₱250,000 annual exemption and flat 6% donor’s tax.
- Spread large gifts over several years, when practical, to maximize the annual exemption.
For Commercial Transactions with Third Parties:
- A genuine Deed of Sale is the natural and appropriate route.
- Attempting to mask a donation as a sale or vice versa creates legal and tax risk.
For Estate Planning:
- Combine lifetime donations (with donor’s tax) and transfers upon death (subject to estate tax).
- Consider the new estate tax regime (also 6% rate with significant standard deductions) and weigh which transfers should happen during life vs at death.
Always Align Form with Substance
- If the transfer is truly gratuitous, use a Deed of Donation and pay donor’s tax.
- If there is genuine consideration, use a Deed of Sale and pay CGT/income tax and DST.
- Misalignment invites scrutiny and reclassification.

X. Summary Table

Aspect	Deed of Sale	Deed of Donation
Nature of transfer	Onerous (for a price)	Gratuitous (by liberality)
Main national tax	6% CGT on value (or income tax/CWT)	6% Donor’s Tax on net gifts > ₱250,000/year
Exemption threshold	None (per sale)	₱250,000 net gifts per donor per year
Tax base (real property)	Higher of selling price, zonal, or FMV	FMV at time of donation (usually zonal/FMV)
Documentary Stamp Tax (DST)	Clearly imposed on sale deed	Depends on instrument; less straightforward
Local transfer tax	Typically applicable	Typically also applicable
Who is primarily taxed	Seller (for CGT/income tax)	Donor (for donor’s tax)
Common use case	Commercial sale, third-party transfers	Intra-family transfers, estate planning
Risk of reclassification	If price is simulated or grossly inadequate	If donation is actually onerous or for consideration

XI. Final Notes

The choice between a Deed of Donation and a Deed of Sale has significant tax consequences in the Philippines, especially for real property.
After the TRAIN Law’s simplification of donor’s tax to a flat 6%, donations—particularly within families—have become more tax-efficient in many scenarios.
However, one must also weigh:
- civil law effects (legitime, future disputes),
- compliance requirements,
- penalties for missteps, and
- the risk of BIR recharacterizing a transaction based on its true nature.

For actual transactions, it is prudent to:

Analyze the specific facts (type of property, value, parties, business use),
Consider lifetime vs testamentary transfers, and
Seek professional advice for current rules, exemptions, forms, and procedures, since tax law and administrative practice can evolve over time.