Eligibility for Capital Gains Tax (CGT) Exemption on Inherited Property in the Philippines

This is a practical, everything-you-need-to-know guide written for the Philippine setting. It reflects general rules under the National Internal Revenue Code (NIRC) as amended (e.g., TRAIN), and common BIR practice as of recent years. It’s not a substitute for legal advice on your specific facts.

The big picture (short version)

No CGT on inheritance itself. When the decedent’s property passes to the heirs by succession, that transfer is not a sale—so no CGT is due. What applies at that stage is estate tax (separate topic).
CGT appears when the heirs (or the estate) sell the inherited real property. If the property is a capital asset, the sale is generally hit by 6% CGT on the higher of the gross selling price (GSP) or fair market value (FMV/zonal value).
There are only narrow ways to avoid or sidestep CGT on a post-inheritance sale—chiefly the principal residence exemption for natural persons, and a few non-applicability scenarios (e.g., the property is an ordinary asset so the sale is taxed differently, not via CGT).

Key definitions you’ll see everywhere

Capital asset: For individuals, real property not used in business (e.g., your home lot).
Ordinary asset: Real property used in trade or business (e.g., held for sale by a developer, or used in your rental business).
Estate: A separate taxable entity representing the decedent’s properties before full distribution to the heirs.
FMV for CGT: The higher of (a) BIR zonal value or (b) assessor’s FMV in the current tax declaration.

Why this matters: CGT applies only to sales of capital assets. If the asset is ordinary, CGT does not apply (but other taxes do).

When CGT does not apply to inherited property

1) Transfer by inheritance (succession)

The transfer from decedent to heirs is not subject to CGT.
Taxes at this stage: Estate tax (flat rate on the net estate, with standard and family-home deductions), plus documentary requirements for CAR/eCAR and title transfer.
Partition among heirs (dividing what they already own in common) generally isn’t a taxable sale; but cash equalization/owelty or distributions beyond one’s legit share may have tax consequences on the excess.

2) The principal residence CGT exemption (sale by a natural person)

If the seller is an individual (not a corporation, not the estate) and the property sold is his/her principal residence, the sale can be exempt from the 6% CGT if all of the following are satisfied:

Principal residence: It is the seller’s actual main home at the time of sale (evidence usually includes IDs, bills, barangay certificate, etc.).
Reinvestment: The proceeds are fully utilized to acquire or construct a new principal residence in the Philippines within 18 months from the date of sale.
- If only part of the proceeds is used, the unutilized portion is subject to proportionate CGT.
Once every 10 years: You can avail of this exemption only once in 10 years.
Notice & escrow: You must notify the BIR (typically within 30 days from sale) of your intent to use the exemption and park the would-be CGT in a bank escrow while you reinvest. After you prove full utilization within 18 months, the escrow is released back to you; otherwise BIR keeps the portion corresponding to the unutilized proceeds.
Carry-over basis: The cost basis of your old principal home is carried over to the new one (so the deferred gain isn’t lost forever; it’s baked into the new property’s basis).

Inherited property angle: Heirs can use this only if they themselves actually live in the inherited property as their principal residence and then sell it. It cannot be used by the estate (the estate isn’t a “natural person”), and you can’t piggyback on the decedent’s principal-residence status.

Example (proportionate tax):

FMV/zonal value = ₱12,000,000 (higher than the contract price), so the benchmark for CGT/escrow is 6% of ₱12,000,000 = ₱720,000.
You reinvest only ₱9,000,000 within 18 months. Utilization = 9M / 12M = 75%.
25% of the escrowed ₱720,000 (i.e., ₱180,000) becomes the CGT due; the rest is released.

3) Not a capital-asset sale (so CGT doesn’t apply)

If the inherited property is used in your trade/business (e.g., converted to rental operations, inventory for a realty business), it becomes an ordinary asset.
A sale of an ordinary asset is not subject to CGT; instead, it’s subject to regular income tax (graduated rates for individuals) plus applicable business tax (e.g., VAT or percentage tax), and creditable withholding tax rules may apply.

4) Real property outside the Philippines

The 6% CGT on real property applies to Philippine-situs land/buildings.
If the inherited real property is located abroad, a sale isn’t hit by Philippine 6% CGT on real property. (But Philippine residents may still have income-tax reporting on foreign gains under different rules.)

5) Tax-free corporate exchanges (advanced planning)

Certain transfers of property to a corporation in exchange for shares can qualify as tax-free under specific reorganization provisions. This isn’t common for heirs but can be part of estate rationalization plans if the strict requirements are met. Get counsel before attempting.

When CGT applies (typical cases)

Heirs sell the inherited house/lot (capital asset) after settlement: 6% CGT on the higher of GSP or FMV/zonal value.
The estate sells the property before distribution: the estate (as a taxpayer) pays 6% CGT if the property is a capital asset. The principal residence exemption is not available to the estate.
Dación en pago (property given to a creditor to settle a debt) is a disposition—generally subject to CGT if the property is a capital asset.

Who files & when:

Seller (heir/s or the estate) files the Capital Gains Tax Return and pays within 30 days from the date of sale/transfer (e.g., date of notarization of Deed of Absolute Sale).
You’ll also handle Documentary Stamp Tax (DST), local transfer tax, registration fees, and secure a CAR/eCAR from the BIR before the Registry of Deeds will transfer title.

Special issues unique to inherited property

“Stepped-up basis.” For income-tax purposes (not CGT), heirs generally take the property with a basis equal to the FMV at the date of the decedent’s death. This matters if you later convert to ordinary asset (e.g., run a rental business) and sell—your gain/loss for regular income tax is measured from that stepped-up basis.

Note: For CGT, the tax is on gross (higher of GSP or FMV), so basis is irrelevant to the 6% computation.
Co-owned inherited property. If several heirs sell:
- Each heir is a separate taxpayer for his/her pro-rata share.
- Only those who personally meet the principal residence conditions may claim the exemption—but only for their own share. The rest pay CGT.
Unequal partition and “cash to boot.” If an heir receives property beyond his lawful share and pays cash to others to equalize, tax may arise on those excess transfers (often treated as a sale of that extra share).

How to claim the principal residence exemption in practice

Before the sale (or immediately after)
- Prepare to prove the property is your principal residence (IDs, bills, barangay certification).
- Track your last availment (must be > 10 years ago, if any).
At or shortly after the sale
- File the required notice to the BIR (commonly within 30 days from sale) stating your intent to avail.
- Deposit the equivalent 6% of the relevant FMV/GSP in escrow with an Authorized Agent Bank (AAB).
Within 18 months from sale
- Fully utilize the proceeds to buy or build your new principal residence in the Philippines. Keep official receipts, titles, building contracts/permits.
After utilization
- Submit proof to BIR; request release of the escrow (or forfeiture proportionate to the unutilized portion).
- Remember the basis carry-over rule to your new principal residence.

Common pitfalls to avoid

Selling while the property is still titled in the estate’s name and trying to claim the individual principal residence exemption. Doesn’t work—the seller must be a natural person who used it as principal residence.

Missing the 30-day notice or the 18-month reinvestment window.

Forgetting the once-every-10-years limit.

Treating the contract price (instead of the higher FMV/zonal) as the benchmark for the escrow and computations.

Other taxes and costs alongside (or instead of) CGT

Documentary Stamp Tax (DST) on deeds of sale.
Transfer tax at the city/municipality/province.
Registration fees (Registry of Deeds).
Notarial fees and incidental costs.
Real property tax arrears must be cleared before transfer.
If the sale is of an ordinary asset, expect creditable withholding tax (CWT) by the buyer, plus VAT/percentage tax if applicable.

Quick decision map (plain-English flow)

Are you merely inheriting it? → No CGT. Focus on estate tax and transfer formalities.
Are you selling after you’ve inherited?

Is it your principal residence?
- Yes → Plan to reinvest 100% of proceeds in a new PH principal residence within 18 months, and follow the notice + escrow process → CGT exemption (or partial if not fully reinvested).
- No → 6% CGT applies if it’s a capital asset.
Is it used in business (ordinary asset)?
- Yes → CGT not applicable; expect regular income tax + business tax/CWT.

Is the land/building located abroad? → No Philippine 6% CGT on the real property sale (but check separate income-tax reporting rules).

Practical tips

Name matters. If you aim for the principal residence exemption, transfer the title to you first (via estate settlement), then sell as a natural person.
Evidence of residence: Keep bills, IDs, barangay certifications showing the property as your primary abode.
Timelines: Diarize the 30-day notice and 18-month reinvestment deadline—these are the most commonly missed requirements.
Co-heirs: If only one heir qualifies for principal residence, consider separate deeds for proportionate shares (subject to deal mechanics and buyer acceptance), so that heir can cleanly claim the exemption on his/her part.
Plan ahead: If you intend to rent out first (ordinary asset), CGT disappears but regular income tax arrives; run the numbers with a tax professional.

FAQs

Q: We sold the inherited property while it was still under the estate. Can we use the principal residence exemption? A: No. The estate isn’t a natural person, and it doesn’t have a principal residence. The sale is typically subject to 6% CGT if the property is a capital asset.

Q: Does living in the inherited house for just a few months qualify as “principal residence”? A: The law looks to your actual main home. There’s no bright-line month count, so the BIR will look at facts and proof (IDs, bills, barangay certs). The stronger your evidence of habitual residence, the better.

Q: We used only 80% of the proceeds to buy a new home within 18 months. How much CGT do we pay? A: You owe 6% on 20% of the higher of GSP or FMV/zonal value. (You also forfeit that 20% portion of the escrow.)

Q: The property is in the U.S., inherited by a Philippine resident. Is there Philippine CGT? A: The 6% real-property CGT applies to land/buildings in the Philippines. Property outside the country isn’t covered by that tax, though income-tax rules on foreign income may still apply.

Bottom line

Inheritance itself: No CGT.
Sale after inheritance: 6% CGT if a capital asset, unless you (as a natural person) validly use the principal residence exemption (full reinvestment within 18 months, once every 10 years, with notice + escrow + proofs).
If the property is ordinary, CGT doesn’t apply—but other taxes do.

If you want, tell me your exact scenario (who sells, when, where the property is, whether anyone lives there, prices/values, and timing) and I’ll map out the step-by-step filings, forms, and actual pesos you should expect to pay—or how to structure it to qualify for the principal-residence exemption.