Introduction

In the Philippine tax system, the sale of real property often triggers various fiscal obligations, with capital gains tax (CGT) being one of the most prominent. This tax is governed primarily by the National Internal Revenue Code of 1997 (Republic Act No. 8424), as amended by subsequent laws such as the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963) and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act (Republic Act No. 11534). A common question among property owners is whether CGT applies when real property is sold at a loss—that is, when the selling price is lower than the original acquisition cost. This article explores the intricacies of CGT in this context, including its legal basis, computation, implications for losses, exemptions, and related considerations. Understanding these rules is crucial for taxpayers to ensure compliance and avoid penalties from the Bureau of Internal Revenue (BIR).

Understanding Capital Gains Tax on Real Property

Definition and Scope

Capital gains tax is a final tax imposed on the presumed gain from the sale, exchange, or other disposition of real property classified as a capital asset. Under Section 24(D) of the Tax Code, real property is considered a capital asset if it is not used in the trade or business of the taxpayer. This includes residential lots, vacation homes, or investment properties not actively generating business income. In contrast, properties used in business (ordinary assets) are subject to regular income tax rather than CGT.

The tax applies to individuals, estates, trusts, and domestic corporations. Foreign corporations and non-resident aliens may also be liable, depending on the property's location and their tax status. Importantly, CGT is a transaction-based tax, not strictly tied to actual profit. It presumes a gain based on the transaction value, regardless of the taxpayer's net financial outcome.

Legal Basis

The foundational provision is Section 24(D) for individuals and Section 27(D) for corporations in the Tax Code. The rate is a flat 6% on the gross selling price or the fair market value (FMV), whichever is higher. FMV is determined by the higher of:

The zonal value established by the BIR (based on Revenue District Office valuations).
The assessed value from the local government unit (LGU).

This "whichever is higher" rule ensures the tax base reflects current market conditions, preventing undervaluation. Revenue Regulations (RR) No. 7-2003 and subsequent issuances, such as RR No. 8-2013, provide detailed guidelines on implementation, including documentation requirements.

Computation of Capital Gains Tax

Basic Formula

CGT = 6% × (Gross Selling Price or FMV, whichever is higher)

Gross Selling Price: The total consideration received, including cash, installments, assumed mortgages, or fair value of exchanged property. It excludes VAT if applicable (VAT applies only if the seller is habitually engaged in real estate business).
Fair Market Value: As noted, this is the BIR zonal value or LGU assessed value, whichever is higher. If the property is sold through installment, the tax is computed on the full value upfront, but payment can be deferred under certain conditions.

Example Scenarios

Consider a residential lot purchased for PHP 5,000,000 in 2010, now sold in 2025:

Sale at Profit: Selling price = PHP 8,000,000; FMV = PHP 7,500,000. CGT = 6% × PHP 8,000,000 = PHP 480,000.
Sale at Loss: Selling price = PHP 4,000,000; FMV = PHP 4,500,000. CGT = 6% × PHP 4,500,000 = PHP 270,000. Even though the seller incurs a PHP 1,000,000 loss (compared to acquisition cost), tax is still due on the FMV.
Undervalued Sale: Selling price = PHP 3,000,000; FMV = PHP 6,000,000. CGT = 6% × PHP 6,000,000 = PHP 360,000. The BIR disregards the low selling price to prevent tax avoidance.

These examples illustrate that CGT is not computed on actual gain (selling price minus cost basis, improvements, and expenses). Instead, it's a percentage of the deemed value, making it unavoidable even in loss situations.

Implications of Selling Real Property at a Loss

Why Tax is Still Payable

The Philippine CGT regime does not recognize actual losses for real property dispositions. Unlike the regular income tax system, where losses can offset gains or be carried forward, CGT on real property is a final, withholding tax. The law presumes a gain to simplify administration and curb underreporting. Thus, even if the sale results in a financial loss (e.g., due to market downturns, depreciation, or forced sales), the 6% tax applies based on the transaction's value.

This can be burdensome for sellers facing economic hardships, such as during recessions or personal financial crises. For instance, in cases of foreclosure or distress sales, the tax obligation remains, potentially exacerbating the loss. Taxpayers cannot deduct selling expenses, commissions, or original costs from the CGT base.

Treatment of Losses in Broader Tax Context

While CGT itself ignores losses:

Capital Losses Offset: For other capital assets (e.g., stocks), losses can offset gains within the same year, with carryover allowed for up to three years (Section 39(B)). However, real property CGT is ring-fenced and does not participate in this netting.
Ordinary Assets: If the property qualifies as an ordinary asset (e.g., held by a real estate dealer), the sale is subject to regular income tax (up to 35% for individuals or 25% for corporations post-CREATE). Here, actual losses can be deducted from gross income, potentially reducing overall tax liability.
No Carryover for CGT: Losses from real property sales cannot be carried forward or backward against future gains.

In practice, some taxpayers reclassify properties as ordinary assets to avail of loss deductions, but this requires substantiation (e.g., proof of business use) and BIR approval to avoid reclassification risks.

Exemptions and Relief Measures

General Exemptions

Certain transactions are exempt from CGT:

Principal Residence Exemption: Under Section 24(D)(2), sales of a principal residence are exempt if the proceeds are fully utilized to acquire or construct a new principal residence within 18 months. The taxpayer must notify the BIR within 30 days and submit proof. Partial utilization results in proportional tax. This applies even in loss sales, but the exemption focuses on reinvestment, not the loss itself.
Expropriation: Government takings under eminent domain are exempt if reinvested similarly.
Mergers and Consolidations: Corporate restructurings may qualify for tax-free treatment under Section 40(C).
Donations: Transfers to government or qualified donees may be exempt, but subject to donor's tax.

Installment Sales Relief

For installment sales (where less than 25% of the price is received initially), CGT can be paid proportionally as installments are collected (RR No. 17-2003). This eases cash flow in loss scenarios but does not eliminate the tax.

No Specific Loss Relief

There is no direct waiver or credit for sales at a loss. Proposals for reform, such as basing CGT on actual gains, have been discussed in Congress but not enacted as of recent amendments. Taxpayers in loss positions may explore VAT refunds if applicable or claim losses in their income tax returns if the property borders on ordinary asset status.

Related Taxes and Obligations

Documentary Stamp Tax (DST)

In addition to CGT, DST at 1.5% of the selling price or FMV (whichever higher) applies under Section 196. This is separate and due regardless of gain or loss.

Creditable Withholding Tax (CWT)

For sales by non-habitual sellers, buyers withhold 6% CGT at source. For habitual sellers (ordinary assets), it's 5% CWT creditable against income tax.

Value-Added Tax (VAT)

If the seller is in the real estate business and the property exceeds PHP 3,199,200 (threshold as adjusted), 12% VAT applies on the gross selling price. Losses do not affect VAT liability.

Local Transfer Taxes

LGUs impose taxes (up to 0.75% in provinces, higher in cities like Manila) on the transfer, based on assessed value.

Reporting and Payment

CGT must be paid within 30 days of the sale via BIR Form 1706. Late payment incurs 25% surcharge, 12% interest, and compromise penalties. Notarization of the deed of sale is required, and registration with the Registry of Deeds follows tax clearance.

Penalties for Non-Compliance

Failure to pay CGT, even in loss sales, can lead to:

Assessment and collection actions by the BIR.
Criminal prosecution for tax evasion if willful.
Attachment of properties or bank accounts.

Taxpayers should maintain records like deeds, receipts, and valuations to support filings.

Planning Considerations

To mitigate CGT in potential loss scenarios:

Timing Sales: Wait for market recovery if possible.
Reinvestment: Utilize the principal residence exemption.
Entity Structuring: Hold properties through corporations for potential ordinary asset treatment.
Consult Professionals: Engage certified public accountants or lawyers specializing in tax to review classifications and explore relief.

However, aggressive planning must avoid anti-avoidance rules under the Tax Code.

Conclusion

In summary, yes, capital gains tax is generally payable when selling real property at a loss in the Philippines. The 6% tax is based on the higher of the gross selling price or fair market value, without regard to actual losses. This presumptive approach simplifies taxation but can impose burdens on sellers. While exemptions like the principal residence rule provide some relief, there are no direct provisions for loss offsets in the CGT framework. Taxpayers should stay informed of legislative changes, as tax laws evolve, and consult the BIR or experts for case-specific advice to ensure compliance and optimize outcomes.