Introduction

In the Philippines, the sale of real property is subject to various taxes under the National Internal Revenue Code (NIRC) of 1997, 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). Among these, the Capital Gains Tax (CGT) is a key imposition on the transfer of real property classified as capital assets. This tax is designed to capture the presumed gain from the appreciation in value of such properties upon disposition.

CGT applies specifically to real properties that are not held primarily for sale in the ordinary course of trade or business. For properties considered ordinary assets (e.g., those used in business or held by real estate dealers), the gains are treated as ordinary income subject to regular income tax rates rather than CGT. This article provides a comprehensive overview of CGT on real property sales, including its legal basis, applicability, computation methods, exemptions, filing requirements, and related considerations. It draws from prevailing Philippine tax laws and regulations issued by the Bureau of Internal Revenue (BIR).

Legal Basis and Scope

The CGT on the sale of real property is governed by Section 24(D) of the NIRC, as amended. It imposes a final tax of 6% on the gain presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, provided such property is classified as a capital asset.

Definition of Capital Assets vs. Ordinary Assets

Capital Assets: These include real properties held by the taxpayer that are not used in trade or business, not held for sale in the ordinary course, and not subject to inventory or depreciation. Examples include residential lots, vacation homes, or inherited lands not actively developed for profit.
Ordinary Assets: Properties used in business (e.g., land for a factory), held by real estate developers or dealers, or those subject to inventory. Gains from these are taxed as ordinary income at progressive rates (up to 35% for individuals or 25-30% for corporations under CREATE).

The distinction is crucial because only capital assets trigger CGT. If a property is reclassified (e.g., from capital to ordinary due to business use), the tax treatment changes accordingly.

Taxable Transactions

CGT applies to:

Outright sales.
Exchanges (e.g., property swaps).
Other dispositions, such as donations (treated as sales at fair market value if not exempt), foreclosures, or pacto de retro sales where repurchase does not occur.

It does not apply to:

Transfers by way of succession (inheritance).
Mergers or consolidations under tax-free exchange rules (Section 40(C)(2) of the NIRC).
Sales to the government or its instrumentalities for public use.

Rate of Capital Gains Tax

The CGT rate is a flat 6% applied to the higher of:

The gross selling price (GSP), or
The current fair market value (FMV) as determined by the BIR (zonal value) or the local assessor (assessed value), whichever is higher between zonal and assessed.

This is a final withholding tax, meaning it is withheld at source and constitutes the full tax liability on the gain. No deductions for actual costs or losses are allowed in the computation, as the tax is based on a presumed gain.

Under the TRAIN Law, the rate was standardized at 6% effective January 1, 2018, replacing the previous graduated rates (up to 32%). The CREATE Act did not alter this rate for real property sales.

Step-by-Step Computation of Capital Gains Tax

Computing CGT involves several steps to ensure accuracy and compliance. Below is a detailed guide:

Step 1: Determine the Tax Base

Identify the GSP: This is the total consideration received or receivable by the seller, including cash, fair value of property received in exchange, assumption of liabilities, and installment payments (if any).
Determine the FMV:
- Zonal Value: Published by the BIR under Revenue Memorandum Orders (RMOs), based on location. Available on the BIR website or district offices.
- Assessed Value: From the local government unit (LGU) tax declaration.
Tax Base = Higher of GSP or FMV.

If the sale is on installment (payments over time), the tax base is prorated based on collections, but the full CGT must be paid upfront if the initial payment exceeds 25% of the GSP (under Revenue Regulations No. 16-2005).

Step 2: Apply the Tax Rate

CGT = Tax Base × 6%.

Step 3: Account for Installment Sales (If Applicable)

For installment sales where initial payments ≤ 25% of GSP:
- CGT is computed and paid proportionally as installments are received.
- Formula: CGT per installment = (Collection / GSP) × (GSP or FMV, whichever higher) × 6%.
If initial payments > 25%, the entire CGT is due upon sale.

Step 4: Deduct Creditable Withholding Taxes (If Any)

In practice, CGT is withheld by the buyer (as withholding agent) and remitted to the BIR. The seller receives a credit for this against any other tax liabilities.

Example Computation

Suppose a residential lot (capital asset) is sold for P5,000,000. The BIR zonal value is P6,000,000, and the assessed value is P5,500,000.

Tax Base = Higher of P5,000,000 (GSP) or P6,000,000 (zonal FMV) = P6,000,000.
CGT = P6,000,000 × 6% = P360,000.

If sold on installment (P1,000,000 initial, balance over 2 years) and initial < 25% (P1,000,000 / P5,000,000 = 20%), CGT is prorated per collection.

Exemptions and Exclusions

Certain transactions are exempt from CGT:

Sale of Principal Residence (Section 24(D)(2), NIRC; RR 13-99):
- Exempt if the proceeds are used to acquire or construct a new principal residence within 18 months.
- Requirements:
  - Seller must notify the BIR Revenue District Officer (RDO) within 30 days of sale.
  - File BIR Form 1706 and secure a Certificate Authorizing Registration (CAR).
  - Escrow the CGT amount if proceeds not fully utilized (proportional exemption).
- "Principal residence" means the dwelling where the seller and family habitually reside.
Exchanges for Shares of Stock (Section 40(C)(2)): Tax-free if in mergers or for control of a corporation.
Sales Below P100,000: No specific exemption, but minimal transactions may fall under de minimis rules in practice.
Government Acquisitions: Exempt if for public purpose and at just compensation.
Foreclosures: Judicial foreclosures may defer CGT until redemption period expires.

Non-resident aliens and foreign corporations may have different treatments, with CGT at 6% but potential treaty relief.

Filing and Payment Procedures

Who Files/Pays: The seller is liable, but the buyer withholds and remits (via BIR Form 1606).
Forms:
- BIR Form 1706: CGT Return, filed by seller within 30 days from sale.
- BIR Form 0619-E: For expanded withholding tax if applicable.
Payment: Due within 30 days from sale/notarization of deed. Paid at Authorized Agent Banks (AABs) or BIR offices.
Documentary Requirements:
- Deed of Absolute Sale (DOAS).
- Tax Declaration.
- Proof of FMV (zonal/assessed).
- Transfer Certificate of Title (TCT).
Certificate Authorizing Registration (CAR): Issued by BIR after CGT payment, required for Register of Deeds to transfer title.
Electronic Filing: Mandatory for large taxpayers; optional for others via eBIRForms.

For installment sales, annual reporting on BIR Form 1700 (Annual Income Tax Return) may be required.

Penalties for Non-Compliance

Failure to comply incurs:

Surcharge: 25% (or 50% if willful neglect/fraud).
Interest: 12% per annum (reduced from 20% under TRAIN).
Compromise Penalty: P1,000 to P50,000 depending on violation.
Criminal penalties for evasion (fines up to P100,000 and/or imprisonment).

Late filing/payment starts from the due date. The BIR may issue deficiency assessments via Letter of Authority audits.

Other Related Taxes and Considerations

Documentary Stamp Tax (DST): 1.5% on GSP or FMV, whichever higher (Section 196, NIRC).
Local Transfer Tax: 0.5-0.75% on GSP or FMV, paid to LGU within 60 days.
Value-Added Tax (VAT): 12% if seller is VAT-registered and property is ordinary asset.
Donor's Tax: If disguised as donation to avoid CGT.
Estate Tax Interaction: If property sold post-death, basis steps up to FMV at death.
Tax Treaties: Non-residents may claim reduced rates or exemptions.
Inflation Adjustments: No automatic indexing; FMV updates via BIR RMOs.
COVID-19 Relief: Past Bayanihan Acts provided extensions, but as of 2023, standard rules apply.

Planning and Strategies

To minimize CGT:

Time sales when FMV is low.
Utilize principal residence exemption.
Structure as tax-free exchanges.
Consult tax professionals for reclassification or deferral options.

Taxpayers should maintain records for at least 3 years (or 10 for fraud) to support computations during audits.

Conclusion

The CGT on real property sales in the Philippines is a straightforward yet critical tax that ensures equitable contribution from property transactions. By understanding its computation, exemptions, and procedures, sellers can ensure compliance and avoid penalties. Always refer to the latest BIR issuances for updates, as tax laws evolve. For specific cases, seeking advice from a certified public accountant or lawyer specializing in taxation is recommended.