Selling Donated Property from a Deceased Donor in the Philippines

Introduction

In the Philippine legal system, the transfer of property through donation is a common estate planning tool, allowing individuals to gift assets during their lifetime (inter vivos) or in contemplation of death (mortis causa). When the donor passes away, questions often arise regarding the donee's ability to sell the donated property. This article explores the intricacies of selling such property, focusing on the Civil Code of the Philippines (Republic Act No. 386), relevant tax laws, and jurisprudence. Key considerations include the validity of the donation, potential revocation by heirs, restrictions on alienation, and fiscal obligations. While donations inter vivos vest ownership in the donee immediately upon perfection, the donor's death may trigger scrutiny from compulsory heirs or tax authorities, potentially complicating a sale.

This discussion assumes the donation was inter vivos, as mortis causa donations are treated as testamentary dispositions under succession rules and do not typically confer immediate ownership for sale purposes. If the donation was improperly classified, it may be recharacterized, affecting sale prospects.

Legal Framework for Donations

Donations in the Philippines are governed primarily by Articles 725 to 773 of the Civil Code. A donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it (Art. 725). For immovable property (e.g., land, buildings), the donation must comply with formal requirements to be valid:

Formality: The donation of real property must be made in a public instrument (notarized deed), specifying the property and any charges imposed (Art. 749). Acceptance by the donee must also be in a public instrument, either in the same document or a separate one, and notified to the donor during their lifetime (Art. 749).
Types of Property: Movable property donations have lighter formalities—oral if value is below PHP 5,000, or written if higher (Art. 748)—but this article focuses on immovables, as they are more commonly subject to sale disputes post-donor death.
Inter Vivos vs. Mortis Causa: An inter vivos donation takes effect immediately and is irrevocable except for specific grounds. A mortis causa donation is revocable and effective only upon the donor's death, akin to a legacy in a will (Art. 728). Misclassification can lead to nullity; for instance, if a "donation" reserves usufruct for life or is revocable, it may be deemed mortis causa (e.g., Heirs of Sevilla v. Sevilla, G.R. No. 150179, 2003).

Upon the donor's death, the property, if validly donated inter vivos, forms no part of the estate for distribution, unless challenged.

Validity and Perfection of the Donation

For the donee to sell the property after the donor's death, the donation must have been validly perfected during the donor's lifetime:

Capacity: Both donor and donee must have capacity—the donor must be of sound mind and not prohibited (e.g., no donations between spouses during marriage, except moderate gifts; Art. 87, Family Code). Minors or incompetents require guardians.
Acceptance: Must occur during the donor's life (Art. 746). Delayed acceptance post-death voids the donation.
Registration: While not required for validity between parties, registration with the Registry of Deeds is necessary for the title to bind third parties (Presidential Decree No. 1529). Unregistered donations may lead to issues in selling, as buyers demand clean titles.
Common Defects: Donations exceeding the donor's disposable portion (free from legitime) may be inofficious and reducible. Fraud, undue influence, or simulation (e.g., disguised sale to evade taxes) can render it void (Arts. 1330-1344).

If the donation is invalid, the property reverts to the estate, and heirs may claim it, blocking any sale by the purported donee.

Rights of the Donee

Once perfected, the donee acquires full ownership rights, including the right to possess, use, and dispose of the property (Art. 427). Post-donor death:

Alienation: The donee can sell, mortgage, or lease the property freely, unless the donation imposes conditions (e.g., a prohibition on sale for a period, which must not exceed 20 years under Art. 494 for usufructs, but analogous for donations).
Fruits and Improvements: The donee owns all fruits from acceptance (Art. 441) and can recover improvements made in good faith.
Warranties: The donor warrants against eviction and hidden defects (Arts. 1547-1560, by analogy to sales), but liability is limited in gratuitous transfers.

However, these rights are subject to challenges, as discussed below.

Potential Challenges by Heirs

The donor's death often invites disputes from compulsory heirs (e.g., legitimate children, spouse), who may contest the donation:

Infringement on Legitime: Legitime is the portion of the estate reserved for heirs (e.g., 1/2 for legitimate children; Art. 888). Donations reducing this are inofficious and can be reduced or rescinded via collation (bringing back fictitiously to the estate for computation; Arts. 908-910, 1061-1077). Heirs must file an action within 5 years from the donor's death (Art. 1149).
Revocation Grounds: Even post-death, donations can be revoked for:
- Ingratitude (e.g., donee commits offense against donor's person/property; Art. 765), actionable by heirs within 1 year from knowledge.
- Birth or adoption of a child after donation (Art. 760), reducing the donation.
- Non-fulfillment of charges (e.g., if donation was conditional on donee caring for donor; Art. 764).
Fraud or Undue Influence: Heirs can annul if proven (4-year prescription; Art. 1391).
Jurisprudence: In Heirs of Policronio Quintos v. People, G.R. No. 225781 (2017), courts upheld reduction of donations impairing legitime. If challenged, a lis pendens notice on the title can hinder sale until resolution.

To sell amid challenges, the donee may need judicial clearance or settlement with heirs.

Revocation or Reduction Process

If heirs seek revocation/reduction:

Collation: Donations are collated in probate or intestate proceedings to compute net estate and legitime.
Action: Filed in Regional Trial Court; if successful, excess property returns to estate or donee compensates heirs.
Effect on Sale: A pre-death revocation voids title ab initio. Post-death, pending actions create clouds on title, deterring buyers. Buyers in good faith may be protected under the Torrens system if title is clean (P.D. 1529).

Donees should secure heir waivers or court approval before selling to mitigate risks.

Process of Selling the Property

Assuming valid donation and no challenges:

Title Verification: Obtain certified true copy of title from Registry of Deeds; ensure annotated donation.
Clearances: Secure tax clearances (e.g., from BIR for donor's estate taxes, if applicable) and barangay/municipal certifications.
Deed of Sale: Execute notarized deed with buyer; pay documentary stamp tax (1.5% of value).
Tax Payments: Capital gains tax (6% of selling price or zonal value, whichever higher; R.A. 10963, TRAIN Law) and creditable withholding tax.
Registration: Buyer registers with Registry of Deeds and BIR; transfer tax (up to 0.75% municipal).
Special Considerations: If property is agricultural, comply with CARP (R.A. 6657) restrictions on sale. For conjugal property donations, spousal consent was needed pre-donation.

If donor died without paying donor's tax (6% under TRAIN Law), BIR may impose liens, blocking sale.

Tax Implications

Donor's Side: Donor pays donor's tax upon execution (file BIR Form 1800 within 30 days). Unpaid tax becomes lien on property (Sec. 96, NIRC).
Donee's Side: No income tax on receipt, but basis for capital gains is donor's basis (stepped-up if appraised higher).
Sale by Donee: Capital gains tax applies; if held less than 1 year, potentially ordinary income. Estate taxes on donor's estate may include donated property if collated.
Exemptions: Donations to government or charities may be exempt, but not for private donees.

Non-payment can lead to BIR auction of property.

Conclusion

Selling donated property from a deceased donor in the Philippines hinges on the donation's validity, absence of heir challenges, and compliance with formalities and taxes. While the donee generally enjoys full disposal rights, the Civil Code's protections for legitime ensure heirs' interests, often necessitating legal counsel. Prospective sellers should consult a notary or lawyer to review titles and secure clearances, avoiding costly litigation. In essence, what appears as a simple gift can entangle in complex succession and fiscal webs post-donor death, underscoring the importance of proper planning.