In the Philippine legal and tax framework, the disposition of real property is a taxable event governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent legislation such as the TRAIN Law (Republic Act No. 10963). One of the most critical taxes encountered in these transactions is the Capital Gains Tax (CGT).

Nature of Capital Gains Tax

Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines. It is important to note that the law presumes a gain exists regardless of whether the seller actually profited or incurred a loss from the sale.

Capital Assets vs. Ordinary Assets

The applicability of CGT depends entirely on the classification of the property. Under Section 39 of the NIRC:

Capital Assets: These include property held by the taxpayer (whether or not connected with his trade or business) that are not used in business. Examples include a family home, vacant land held for investment, or residential units not engaged in the business of leasing.
Ordinary Assets: These are properties excluded from the definition of capital assets. They include stock in trade, property held primarily for sale to customers (inventory), and property used in trade or business subject to depreciation.

Transactions involving ordinary assets are not subject to CGT; instead, they are subject to Creditable Withholding Tax (CWT) and the expanded income tax table, and they may be subject to Value-Added Tax (VAT).

The Tax Rate and Tax Base

Under Section 24(D)(1) of the NIRC, a final tax of six percent (6%) is imposed on the gross selling price or current fair market value of the real property, whichever is higher.

To compute the tax, one must determine the Tax Base, which is the highest value among the following three:

Gross Selling Price (GSP): The total amount stipulated in the Deed of Absolute Sale.
Zonal Value (ZV): The value of the land as determined by the Commissioner of Internal Revenue (BIR).
Fair Market Value (FMV): The market value as shown in the schedule of values of the Provincial or City Assessors (found in the Tax Declaration).

The Mathematical Formula

The computation follows this linear equation:

$$CGT = \max(GSP, ZV, FMV) \times 0.06$$

Illustrative Example:

A seller disposes of a residential lot with the following values:

Gross Selling Price: ₱5,000,000
BIR Zonal Value: ₱4,500,000
Assessor's Fair Market Value: ₱4,000,000

In this case, the Tax Base is ₱5,000,000 (the highest of the three). $$CGT = ₱5,000,000 \times 0.06 = ₱300,000$$

Exemptions from Capital Gains Tax

The most significant exemption involves the sale of a Principal Residence. Under Section 24(D)(2) of the Tax Code, an individual may be exempt from CGT if the following conditions are met:

Utilization: The proceeds from the sale are fully utilized in acquiring or constructing a new principal residence.
Timeline: The new residence must be acquired or constructed within eighteen (18) calendar months from the date of sale or disposition.
Notification: The Commissioner of Internal Revenue must be notified within thirty (30) days from the date of sale through a "Notice of Intention" to avail of the exemption.
Frequency: This exemption can only be availed of once every ten (10) years.
Escrow: The 6% CGT amount must be deposited in cash or a manager’s check with an Authorized Agent Bank (AAB) in an escrow account. If the proceeds are not fully utilized, the portion of the tax corresponding to the unutilized amount must be paid.

Filing and Payment Procedures

The responsibility for filing and paying the CGT lies legally with the seller, although contractual agreements may shift the economic burden to the buyer.

Tax Form: BIR Form No. 1706 (Final Capital Gains Tax Return).
Deadline: The return must be filed and the tax paid within thirty (30) days following the sale or disposition (usually the date of notarization of the Deed of Absolute Sale).
Installment Payments: If the initial payment does not exceed 25% of the selling price, the tax may be paid in installments.

Documentary Requirements

For the BIR to issue a Certificate Authorizing Registration (CAR)—which is required to transfer the Title at the Registry of Deeds—the following are typically required:

Notarized Deed of Absolute Sale.
Certified True Copy of the Transfer Certificate of Title (TCT/CCT).
Certified True Copy of the latest Tax Declaration.
Proof of payment of the Documentary Stamp Tax (DST).
Latest Realty Tax Receipt (Tax Clearance).

Consequences of Non-Compliance

Failure to pay the CGT within the prescribed 30-day window results in:

Surcharge: 25% of the basic tax (or 50% in cases of fraud).
Interest: 12% per annum (under the TRAIN Law) on the unpaid amount until fully paid.
Compromise Penalty: An additional fine based on the schedule of penalties provided by the BIR.