Introduction

In the Philippines, the death of a property owner triggers a complex legal process known as estate settlement, which governs the transfer and disposition of the deceased's assets, including real property. This process ensures that the rights of heirs, creditors, and the government are protected under the Civil Code of the Philippines (Republic Act No. 386), the National Internal Revenue Code (Republic Act No. 8424, as amended), and relevant jurisprudence from the Supreme Court. Selling property owned by a deceased individual is not straightforward; it requires settling the estate first to avoid legal disputes, tax penalties, or invalid transactions. This article provides a comprehensive overview of the estate settlement process, the tax implications, and the steps involved in selling such property, all within the Philippine legal framework.

Understanding Estate Settlement

Estate settlement, or "succession," refers to the transmission of the deceased's rights, obligations, and properties to their heirs. Under Article 774 of the Civil Code, succession occurs at the moment of death, but the actual distribution and transfer require formal procedures.

Types of Succession

Testate Succession: Occurs when the deceased left a valid will (testament). The will dictates how the estate is distributed, subject to the rules on legitime (the portion reserved for compulsory heirs). The executor named in the will oversees the process.
Intestate Succession: Applies when there is no will or the will is invalid. Distribution follows the rules in Articles 978-1014 of the Civil Code, prioritizing compulsory heirs such as legitimate children, spouse, and parents.

Compulsory heirs include:

Legitimate children and descendants.
Legitimate parents and ascendants (if no children).
Surviving spouse.
Illegitimate children (entitled to half the share of legitimate children).

The legitime is typically half the estate for free disposal, with the remainder divided among heirs.

Judicial vs. Extrajudicial Settlement

Judicial Settlement: Required if there is a will, disputes among heirs, minor heirs, or outstanding debts. This involves filing a petition in the Regional Trial Court (RTC) where the deceased resided. The court appoints an administrator or executor to manage the estate, pay debts, and distribute assets. The process can take years due to hearings and potential contests.
Extrajudicial Settlement: Allowed under Section 1, Rule 74 of the Rules of Court if there is no will, all heirs are of legal age, agree on the division, and there are no debts (or debts are paid). This is faster and less costly. Heirs execute a Deed of Extrajudicial Settlement of Estate, which must be published in a newspaper of general circulation once a week for three consecutive weeks. A bond may be required if there are potential claims.

In both cases, the estate must be inventoried, appraised, and debts/taxes paid before distribution.

Role of the Bureau of Internal Revenue (BIR) in Estate Settlement

The BIR plays a crucial role in ensuring that estate taxes are settled before properties can be transferred or sold. Under the Tax Code, the estate is treated as a separate taxable entity.

Estate Tax Computation and Filing

Estate Tax Rate: A flat 6% on the net estate value exceeding PHP 5 million (as per the TRAIN Law, Republic Act No. 10963). The net estate is the gross estate minus allowable deductions (e.g., funeral expenses up to PHP 200,000, judicial expenses, claims against the estate, standard deduction of PHP 5 million).
Gross Estate Inclusions: All properties (real, personal, tangible, intangible) owned by the deceased at death, including those transferred in contemplation of death or with retained rights.
Filing Deadline: The Estate Tax Return (BIR Form 1801) must be filed within one year from death. Extensions may be granted for up to 30 days.
Payment: Tax must be paid upon filing, but installment payments are allowed if the estate lacks liquidity (up to two years with interest).
Certificate Authorizing Registration (CAR): Issued by the BIR after tax payment and verification. This is essential for transferring titles at the Registry of Deeds (RD). Without a CAR, no transfer or sale can occur.

Penalties for non-compliance include surcharges (25-50%), interest (12% per annum), and possible criminal liability.

Other BIR Requirements

If the deceased had business interests, income taxes for the estate must be filed annually until settlement.
Donor’s tax may apply retroactively if properties were transferred within five years before death and deemed in contemplation of death.

Steps to Sell Property of a Deceased Owner

Selling property from a deceased's estate involves multiple steps to ensure legal validity. Unauthorized sales can be voided, leading to liabilities.

Pre-Settlement Considerations

Inventory and Appraisal: List all properties and have them appraised by a licensed appraiser or the local assessor’s office for fair market value (zonal value or market value, whichever is higher, per BIR rules).
Payment of Debts and Claims: Creditors have two years from publication (in extrajudicial) or court notice (judicial) to file claims. Unpaid debts can lead to property attachment.
Court Approval for Sales During Administration: If the estate is under judicial administration, any sale requires court approval (Rule 89, Rules of Court) to pay debts or for the heirs' benefit. The administrator petitions the court, and the sale must be at public auction unless otherwise ordered.

Post-Settlement Sale Process

Once the estate is settled and titles transferred to heirs:

Title Transfer: Use the Deed of Extrajudicial Settlement or court order to cancel the old title and issue new ones in the heirs' names at the RD. Required documents include:
- Death certificate (from PSA).
- BIR CAR.
- Tax clearances.
- Affidavit of publication (for extrajudicial).
- Payment of transfer taxes (1.5% documentary stamp tax on the value).
Finding a Buyer: Heirs can sell individually or jointly. If undivided, all must agree or partition first (judicially if no agreement).
Execution of Deed of Sale: A notarized Absolute Deed of Sale is prepared, detailing the property, price, and terms.
Tax Payments on Sale:
- Capital Gains Tax (CGT): 6% on the gross selling price or zonal value, whichever is higher. Paid by the seller (heirs) within 30 days of notarization using BIR Form 1706.
- Documentary Stamp Tax (DST): 1.5% on the selling price or zonal value.
- Creditable Withholding Tax (CWT): If the buyer is a corporation or habitual buyer, 1-6% withheld.
- Local Transfer Tax: Up to 0.75% of the value, paid to the local treasurer.
BIR Clearance for Sale: File for a Certificate Authorizing Registration (CAR) for the sale, confirming CGT payment.
Title Transfer to Buyer: Submit the Deed of Sale, CAR, tax receipts, and other documents to the RD. The buyer's title is issued after annotation.

Special Cases

Minor Heirs: Require a guardian ad litem and court approval for any sale.
Conjugal Property: If married, the surviving spouse owns half; the deceased's half goes to heirs. Community property rules apply (Family Code).
Agricultural Land: Subject to agrarian reform laws (RA 6657); sales may need DAR clearance to prevent circumvention of land reform.
Foreclosed or Mortgaged Property: Lender's consent or redemption required.
Foreign Heirs: Non-residents pay estate tax but cannot own land (Constitution limits land ownership to Filipinos).

Tax Implications and Planning Strategies

Avoiding Common Pitfalls

Double Taxation: Estate tax is on the transfer at death; CGT on subsequent sale. No double taxation as they are distinct.
Valuation Disputes: BIR may reassess values; appeals go to the Court of Tax Appeals.
Penalties for Delay: Late filing incurs 25% surcharge plus interest; willful neglect adds 50%.

Estate Planning Tools

Wills: Holographic (handwritten) or notarial wills can specify distributions.
Trusts: Irrevocable trusts can minimize taxes but must comply with tax rules.
Life Insurance: Proceeds are exempt if irrevocable beneficiary.
Donations Inter Vivos: Lifetime gifts reduce estate size but may attract donor’s tax (6% flat rate).

Conclusion

Selling property of a deceased owner in the Philippines demands meticulous compliance with civil, tax, and procedural laws to ensure a smooth transfer and avoid legal repercussions. Whether through judicial or extrajudicial means, settling the estate prioritizes heir rights, creditor claims, and government taxes. Consulting a lawyer, notary, or tax expert is advisable for case-specific guidance, as laws evolve and individual circumstances vary. Proper planning can mitigate burdens, preserving the deceased's legacy for future generations.