Capital Gains Tax Computation in the Philippines: Is House Square Meterage Included in Zonal Value?

Introduction

In the Philippine tax system, Capital Gains Tax (CGT) is a critical component of revenue generation, particularly for transactions involving real property. Under the National Internal Revenue Code (NIRC) of 1997, as amended, CGT is imposed on the sale, exchange, or other disposition of real property classified as capital assets. A common point of confusion among taxpayers, real estate professionals, and legal practitioners revolves around the determination of the tax base, specifically whether the square meterage of a house or building (i.e., the floor area or built-up area) is factored into the "zonal value" used for CGT computation.

This article provides a comprehensive examination of the topic in the Philippine legal context. It covers the relevant legal framework, definitions, computational methodologies, practical implications, and related considerations. The analysis is grounded in the provisions of the Tax Code, revenue regulations issued by the Bureau of Internal Revenue (BIR), and established administrative practices. The key takeaway is that zonal values pertain exclusively to land and do not incorporate the square meterage of houses or improvements; instead, the value of such structures is assessed separately.

Legal Basis for Capital Gains Tax on Real Property

The foundational law governing CGT in the Philippines is Section 24(D) of Republic Act No. 8424 (the Tax Reform Act of 1997), as amended by subsequent laws such as Republic Act No. 10963 (TRAIN Law) and Republic Act No. 11534 (CREATE Act). This section imposes a final tax of six percent (6%) on the capital gains realized from the sale or disposition of real property located in the Philippines, provided the property is classified as a capital asset (i.e., not ordinarily held for sale in the course of business).

The tax is computed based on the higher of:

The gross selling price (GSP) or the current fair market value (FMV) as determined under the contract of sale, or
The fair market value as determined by the Commissioner of Internal Revenue (i.e., the BIR's zonal value) or the FMV as shown in the schedule of market values of the Provincial or City Assessor, whichever is applicable and higher.

This "higher of" rule ensures that the tax base reflects the true economic value of the transaction, preventing underdeclaration. Importantly, for properties consisting of both land and improvements (e.g., a residential house on a lot), the FMV is not a monolithic figure but a composite of distinct components: the land value and the improvement value.

Understanding Zonal Value: Definition and Scope

Zonal values are administrative valuations established by the BIR pursuant to Section 6(E) of the NIRC, which authorizes the Commissioner to divide the Philippines into zones or areas and determine the FMV of real properties therein for internal revenue tax purposes. These values are periodically revised through Department of Finance (DOF) Orders and BIR Revenue District Office (RDO) issuances to reflect market conditions, location, accessibility, and other factors influencing land prices.

Key characteristics of zonal values:

Unit of Measurement: Zonal values are expressed per square meter of land area. For instance, a zone in a metropolitan area might have a zonal value of PHP 50,000 per square meter.
Applicability: They apply solely to land classifications, such as residential, commercial, industrial, or agricultural lots. Zonal values are used not only for CGT but also for estate tax, donor's tax, and documentary stamp tax computations.
Exclusions: Zonal values do not include the value of buildings, houses, or other improvements erected on the land. This is explicitly clarified in BIR issuances, such as Revenue Memorandum Order (RMO) No. 25-2014, which outlines the guidelines for zonal valuation revisions. The rationale is that land values are influenced by locational factors (e.g., proximity to infrastructure), while improvements depreciate over time and are subject to separate appraisal methods.

In essence, the zonal value for a property is calculated as: [ \text{Zonal Value of Land} = \text{Zonal Value per sqm} \times \text{Land Area in sqm} ] The square meterage of the house (e.g., floor area of 200 sqm) plays no role in this formula.

Valuation of Improvements (e.g., Houses) in CGT Computation

Since zonal values cover only land, the value of improvements like houses must be determined independently. The NIRC and related regulations provide the following guidelines:

Fair Market Value of Improvements: This is based on the current market value as appraised by the local government unit (LGU) assessor under the Real Property Taxation system (Republic Act No. 7160, Local Government Code). Assessors use schedules of market values that consider factors such as construction cost, materials, age, depreciation, and floor area (square meterage).
Role of Square Meterage: Here is where the house's square meterage becomes relevant. The FMV of a house is often computed using a per square meter construction cost multiplied by the total floor area, adjusted for depreciation and other variables. For example: [ \text{Value of House} = (\text{Base Construction Cost per sqm} \times \text{House Floor Area in sqm}) \times (1 - \text{Depreciation Rate}) ] Base costs are derived from BIR-approved schedules or engineering appraisals. If the house is new, costs might range from PHP 20,000 to PHP 50,000 per sqm depending on quality (e.g., economy, standard, or luxury class).
Integration into Tax Base: The total FMV for CGT purposes is the sum of the land's zonal value and the improvement's FMV: [ \text{Total FMV} = \text{Zonal Value of Land} + \text{FMV of Improvements} ] If this total exceeds the GSP, it becomes the tax base.

This separation ensures accurate taxation: land appreciates over time (reflected in zonal values), while buildings may depreciate.

Computational Examples

To illustrate, consider the following hypothetical scenarios:

Sale of Vacant Land:
- Land area: 500 sqm
- Zonal value: PHP 30,000 per sqm
- GSP: PHP 12,000,000
- Zonal value computation: PHP 30,000 × 500 = PHP 15,000,000
- Tax base: Higher of GSP or zonal value = PHP 15,000,000
- CGT: 6% × PHP 15,000,000 = PHP 900,000
- No house involved, so square meterage is irrelevant.
Sale of Land with House:
- Land area: 500 sqm
- House floor area: 300 sqm
- Zonal value (land): PHP 30,000 per sqm → PHP 15,000,000
- FMV of house: PHP 25,000 per sqm × 300 sqm (less 20% depreciation) = PHP 7,500,000 × 0.8 = PHP 6,000,000
- Total FMV: PHP 15,000,000 + PHP 6,000,000 = PHP 21,000,000
- GSP: PHP 18,000,000
- Tax base: PHP 21,000,000
- CGT: 6% × PHP 21,000,000 = PHP 1,260,000
- Note: House square meterage affects only the improvement valuation, not the zonal value.
Edge Case: Condominium Unit:
- For condominiums, zonal values apply to the underlying land (pro-rated per unit), while the unit's square meterage influences its individual FMV based on building appraisals. The same separation applies.

Common Misconceptions and Practical Considerations

Misconception: Zonal Values Include Buildings: Some taxpayers erroneously assume zonal values are all-inclusive, leading to underpayment. BIR audits often reveal this error, resulting in deficiency assessments plus penalties (25% surcharge, 20% interest per annum).
BIR Appraisal Requests: If the assessor's value is disputed, taxpayers can request a BIR appraisal under Revenue Regulations (RR) No. 12-2018. However, BIR typically defers to zonal values for land and requires independent valuations for improvements.
Exemptions and Reliefs: Certain sales are exempt from CGT, such as principal residences under Section 24(D)(2) (via Certificate Authorizing Registration, or CAR). In these cases, zonal value computations are still required for verification.
Documentation Requirements: For CGT payment, sellers must submit BIR Form 1706, supported by deeds of sale, tax declarations, and valuations. Failure to use correct zonal values can delay CAR issuance.
Inflation and Updates: Zonal values are revised every three years or as needed (last major update in 2022-2023). Taxpayers should consult the BIR website or RDO for current values.
Penalties for Non-Compliance: Underpayment due to incorrect valuation can lead to civil penalties (up to 50% surcharge) or criminal charges under Section 255 of the NIRC.

Judicial and Administrative Interpretations

Philippine courts have upheld the BIR's authority to set zonal values as presumptively valid (e.g., in cases like Commissioner of Internal Revenue v. Spouses Salvador, G.R. No. 205333, 2016). Administrative rulings, such as BIR Ruling No. 123-2019, emphasize that improvements are valued separately using replacement cost methods, reinforcing that house square meterage is extraneous to zonal valuation.

Conclusion

In summary, the square meterage of a house is not included in the zonal value for CGT computation in the Philippines. Zonal values are land-specific, calculated per square meter of lot area, while house valuations rely on separate appraisals incorporating floor area, construction costs, and depreciation. This distinction ensures equitable taxation and aligns with the economic realities of real property. Taxpayers are advised to engage certified appraisers or consult BIR offices for precise computations to avoid disputes. Understanding this nuance is essential for compliance in an increasingly regulated real estate market. For complex transactions, seeking advice from tax lawyers or accountants is recommended to navigate potential gray areas.