When “deductions” matter, when they don’t, and how the taxes are computed and paid

Selling farmland in the Philippines can trigger multiple taxes, but the most important point—often missed—is that “taxable income” and “deductions” depend on whether the land is treated as a capital asset or an ordinary asset under the National Internal Revenue Code (NIRC), as amended, and how the transaction is structured.

A typical farmland sale may involve:

Income tax (either through a 6% final capital gains tax or regular income tax on net gain, depending on asset classification and special rules),
Documentary stamp tax (DST) on the deed of sale,
Potential creditable withholding tax (CWT/EWT) if the sale is of an ordinary asset,
Possible VAT in specific business situations, and
Local transfer taxes and fees (LGU transfer tax, registration fees, etc.) that affect net proceeds and may be deductible in some cases.

This article focuses on taxable income from the sale of farmland and the deductions (or lack of them) that apply.

1) The starting question: Is the farmland a capital asset or an ordinary asset?

A. Why classification controls everything

For Philippine tax purposes, the sale of real property generally falls into one of two regimes:

Capital asset sale → usually subject to 6% capital gains tax (CGT) based on gross selling price or fair market value (FMV), whichever is higher.
- Key effect: This CGT is a final tax and is computed on a presumed gain.
- “Deductions” do not reduce the CGT base. Your cost and expenses do not matter for CGT computation.
Ordinary asset sale → taxed under regular income tax rules (individual graduated rates or corporate income tax), generally based on net taxable gain.
- Key effect: Deductions matter a lot (cost basis, improvements, selling expenses, some taxes/fees, etc.).

B. Practical indicators for farmland

Farmland is commonly treated as a capital asset when owned by an individual who is not in the real estate business and the land is not used as a business asset in a way that makes it “ordinary.”

But it may be treated as an ordinary asset, for example, if:

The owner is engaged in business and the farmland is used in trade or business (e.g., used in a farming enterprise as a business asset), or
The seller is a real estate dealer/developer/lessor and the land is held primarily for sale or lease in the ordinary course of business, or
The seller is a corporation where the land is actually used in business (often treated as ordinary asset for purposes of the special 6% corporate CGT rule—see below).

Classification is fact-based, and documentation (tax declarations, business registration, accounting treatment, proof of actual use) heavily influences how the BIR treats the transaction.

2) If the farmland is a capital asset: the 6% CGT system (where deductions don’t reduce the tax)

A. The core rule for individuals

When an individual sells real property in the Philippines classified as a capital asset, the sale is typically subject to 6% CGT computed on the higher of:

Gross selling price (GSP) stated in the deed, or
Fair market value (FMV)

FMV for BIR purposes is commonly determined using the higher of:

The BIR zonal value, and
The LGU assessed value (or the assessment-based market value used for real property tax purposes, depending on locality/documentation)

CGT = 6% × [higher of GSP or FMV]

B. The core rule for corporations (special 6% final tax)

For domestic and resident foreign corporations, a 6% final tax generally applies on the presumed gain from sale of lands and/or buildings treated as capital assets—commonly described (in the Tax Code) as those not actually used in business and treated as capital assets.

C. The “no deductions” consequence (and what people mean by “deductions” anyway)

Under the 6% CGT regime, you do not compute taxable income as:

Selling price – cost – expenses = taxable gain

Instead, the tax is imposed on a presumed gain based on the gross value.

So, items like these do not reduce the CGT base:

Original purchase price / acquisition cost
Cost of improvements (fences, irrigation, leveling, farm roads, etc.)
Brokerage commissions
Legal fees, notarial fees
DST, transfer tax, registration fees
Capital gains tax itself

These costs still matter to you economically (they reduce your net cash), but they are not “deductions” against CGT.

D. Important exceptions/alternatives where “net gain” and deductions can matter even for capital asset sales

There are limited situations where the law allows a different treatment (or choice), and this is where the “deductions” discussion becomes relevant even when the property is capital in nature:

1) Sale to the Philippine government (option rule for individuals)

When an individual sells real property to the government or any of its political subdivisions or agencies/instrumentalities, the seller is generally given an option between:

Paying the 6% CGT, or
Paying regular income tax on the net taxable gain (where cost and expenses become relevant)

This is one of the most practical “deductions matter” exceptions in real property sales.

2) Agrarian reform and special laws

Transfers connected with agrarian reform (e.g., CARP-related transfers) can carry tax exemptions or special treatment under agrarian reform statutes and implementing rules. In practice, whether a farmland transfer is CARP-covered, and what tax consequences apply, depends on the exact mechanism (voluntary sale, compulsory acquisition, beneficiary transfers, etc.), and the documents issued/required by DAR and other agencies.

3) If the farmland is an ordinary asset: taxable income is net gain (deductions are central)

When the farmland sale is treated as a sale of an ordinary asset, the transaction is generally taxed under the regular income tax system (not the 6% final CGT), and you compute taxable income from the sale by determining gain:

A. Basic computation (ordinary asset sale)

In concept:

Gain = Amount realized – Adjusted basis

Where:

Amount realized is generally the selling price minus selling expenses (or the total consideration received/receivable, depending on accounting/tax method).
Adjusted basis is usually:
- Acquisition cost
- Capital improvements (capitalized costs)
- Certain acquisition costs (transfer fees, registration tied to acquisition, etc.) – Accumulated depreciation, if applicable (generally not for land, but potentially for certain improvements/assets)

B. What counts as “deductions” in computing gain?

In an ordinary asset sale, the most important “deductions” are not itemized deductions like rent or salaries. They’re transaction-level offsets that reduce the gain.

1) Cost basis (and how it’s built)

Common components of basis for farmland include:

Purchase price per deed (supported by proof of payment)
Capitalized acquisition costs:
- Certain registration and transfer-related costs paid upon acquisition
- Survey costs tied to acquisition/title consolidation (context-specific)
Capital improvements added over time:
- Land development that adds value or prolongs usefulness (e.g., land leveling, permanent irrigation systems, perimeter fencing, farm roads, drainage works)
- Structures on the land may have separate basis (and potential depreciation), depending on how the seller records them

Substantiation is critical. BIR practice often relies heavily on official receipts, invoices, contracts, and proof of payment.

2) Selling expenses (deductible from proceeds in measuring gain)

Typical selling expenses include:

Broker’s commissions and agent fees
Advertising and marketing costs
Legal fees for negotiation/documentation (when directly tied to the sale)
Notarial fees and documentary costs directly tied to sale
Survey and segregation costs incurred to sell a portion (often arguable as selling expense or capital cost—classification depends on facts and accounting treatment)

3) Transaction taxes and fees: deductible or not?

This is where confusion is common. The same payment can be:

Not deductible against 6% CGT (capital asset sale), but
Potentially deductible as a selling expense (ordinary asset sale), if it is an expense of the sale borne by the seller.

Examples that may be treated as selling expenses (fact-dependent, and depending on who pays under the contract):

DST on the deed of sale
LGU transfer tax
Certain registration fees and charges
Some documentation costs

Whether these reduce taxable gain depends on:

Contract allocation (who shoulders what), and
Evidence of payment by the seller, and
Proper recording

Note: CGT itself is a tax on the transaction; when the sale is an ordinary asset sale, CGT typically isn’t the governing regime. For ordinary asset sales, you’re generally in the income tax system and may also be in withholding/VAT systems depending on seller status.

C. Basis rules: purchase, inheritance, donation, and exchanges

Your deductible basis depends on how you acquired the farmland.

1) If acquired by purchase

Basis is generally cost (price plus capitalized costs).

2) If acquired by inheritance

Philippine rules generally treat inherited property basis using fair market value at the time of acquisition (subject to Tax Code basis rules and documentation).

3) If acquired by donation

The basis rules can be more technical (carryover basis concepts and valuation interactions). Documentation of donor’s basis, donor’s tax filings, and FMV at donation can become relevant.

4) If acquired through tax-free exchanges or reorganizations

Corporate and certain exchange scenarios may use substituted basis rules; farmland held by entities can be affected by these provisions.

4) Income tax rates and “deduction frameworks” for ordinary asset sellers

Once you’ve determined the gain, the next question is how the seller is taxed generally.

A. Individuals (sole proprietors / business taxpayers)

If the farmland is an ordinary asset of an individual engaged in business, the taxable gain generally becomes part of taxable income and may be taxed under:

Graduated income tax rates, with either:
- Itemized deductions, or
- Optional Standard Deduction (OSD) (subject to eligibility and conditions), or
8% income tax option for qualified self-employed individuals/professionals (subject to thresholds and rules)

Important nuance: The 8% option and OSD are systems for computing taxable income from business, and how a large one-time sale of an ordinary asset is treated under these systems can be fact-sensitive (e.g., whether it is treated as part of gross sales/receipts or “other income,” and the interaction with cost of sales). In real disputes, the BIR’s classification and the taxpayer’s accounting/tax reporting alignment become decisive.

B. Corporations

For corporations, ordinary asset sale gains are generally subject to:

Regular Corporate Income Tax (RCIT) (and potentially MCIT rules, depending on the year and taxpayer profile)

Deductions are generally under the corporate deduction framework (ordinary and necessary expenses, substantiated, not capital in nature unless properly capitalized).

5) Withholding tax in ordinary asset farmland sales (often required)

If the farmland is sold as an ordinary asset, the buyer may be required to withhold creditable withholding tax (CWT/EWT) on the transaction under withholding regulations, with rates depending on the classification of the seller and the nature/value of the property.

Key implications:

The withholding tax is generally creditable (applied against the seller’s final income tax due for the year).
It affects cash flow: the seller receives net of withholding.
BIR processes for issuing the Certificate Authorizing Registration (CAR/eCAR) often require proper withholding compliance where applicable.

6) VAT: when a farmland sale can be subject to VAT

A farmland sale is not automatically subject to VAT. VAT exposure depends heavily on whether the sale is considered in the course of trade or business, and whether the property is of the type covered by VAT on real property transactions.

Situations where VAT can arise include:

The seller is a real estate dealer/developer/lessor and the land is held primarily for sale/lease in the ordinary course, and the seller is VAT-registered or required to register;
The transaction is structured as part of a broader taxable real estate business activity.

If VAT applies, the transaction is generally not treated under the 6% CGT regime; instead, it is under the VAT/income tax framework applicable to ordinary assets.

7) Documentary Stamp Tax (DST) on the deed of sale

Regardless of whether the farmland is a capital or ordinary asset, the deed of absolute sale is typically subject to DST.

DST on deeds of sale/conveyances is imposed under the Tax Code’s DST provisions and is commonly computed using a rate per ₱1,000 (or fractional part) of the consideration or value used as basis (subject to the specific DST rules and valuation basis used in practice).

DST is a separate tax from income tax/CGT. It is typically required for title transfer processes and is part of what the BIR looks for before releasing CAR/eCAR.

8) “Deductions” people commonly ask about—how they are treated

Below is a practical matrix of whether a cost reduces tax, depending on the regime:

A. If subject to 6% CGT (capital asset sale)

These do not reduce CGT:

Purchase price / acquisition cost
Improvements
Broker fees
Legal/notarial fees
DST/transfer taxes
Registration fees

They reduce net proceeds, not the CGT base.

B. If taxed as ordinary asset sale (regular income tax on net gain)

Many of these can reduce taxable gain if paid by the seller and properly substantiated:

Acquisition cost and capital improvements → reduce gain via basis
Broker fees, marketing → selling expenses
Legal fees tied to sale → selling expenses
DST/transfer taxes/registration paid by seller → often treated as selling expenses or transaction costs that reduce gain (fact-dependent)

9) Installment sales: cash timing vs tax timing

A. Capital asset sale under 6% CGT

Even if paid in installments, the CGT is generally computed on the full tax base and paid under the CGT filing/payment timeline, because CGT is imposed on the transaction value.

B. Ordinary asset sale

Installment sale rules can affect when gain is recognized, depending on the structure (initial payment threshold concepts and taxpayer type). However, withholding and documentation requirements may still demand attention early in the process.

10) Undervaluation risk: donor’s tax exposure

If farmland is sold for less than adequate and full consideration, the difference between FMV and the stated consideration may be treated as a donation for donor’s tax purposes under the Tax Code’s transfer-for-less-than-adequate-consideration principles.

This risk commonly appears in:

Transfers among relatives
“Friendly” sales with low stated price
Deeds with prices far below zonal/assessed values

Undervaluation can also create:

Higher CGT base anyway (because CGT uses higher of selling price or FMV)
Potential donor’s tax issues
Penalties for misdeclaration and related compliance problems

11) Compliance roadmap (typical Philippine practice)

A farmland sale typically moves through:

Determine classification (capital vs ordinary asset) and taxes due
Prepare documentary requirements (TCT/OCT, tax declaration, IDs, SPA if needed, DAR-related clearances if applicable, etc.)
File and pay:
- CGT return (if capital asset sale under 6%)
- DST return
- Any applicable withholding tax documentation (for ordinary asset sales)
Apply for CAR/eCAR from the BIR/RDO
Pay LGU transfer tax and secure tax clearance (varies by LGU)
Register deed with the Register of Deeds for title transfer

Deadlines matter because late filing/payment triggers surcharges, interest, and compromise penalties.

12) Illustrative computations

Example 1: Capital asset farmland sale (6% CGT; no deductions)

Selling price in deed: ₱3,000,000
FMV (higher of zonal/assessed): ₱3,500,000

Tax base = ₱3,500,000 CGT = 6% × ₱3,500,000 = ₱210,000

Even if the seller originally bought the land for ₱2,900,000 and paid ₱150,000 broker fee, CGT remains ₱210,000.

Example 2: Ordinary asset farmland sale (regular income tax; deductions matter)

Assume farmland is an ordinary asset used in a farming business and sold for ₱3,000,000.

Selling price: ₱3,000,000
Selling expenses (broker, legal, documentation): ₱200,000
Acquisition cost: ₱1,500,000
Capital improvements (capitalized irrigation/fencing): ₱300,000

Compute:

Amount realized ≈ ₱3,000,000 – ₱200,000 = ₱2,800,000
Adjusted basis = ₱1,500,000 + ₱300,000 = ₱1,800,000
Gain = ₱2,800,000 – ₱1,800,000 = ₱1,000,000

That ₱1,000,000 is the transaction gain that flows into the seller’s income tax computation under the applicable regime (individual graduated/OSD/8% option where allowed, or corporate income tax rules).

13) Key takeaways for “taxable income and deductions” on farmland sales

Most private farmland sales by individuals are taxed under the 6% CGT capital asset regime, where deductions do not reduce the tax base.
Deductions become central only when the farmland is an ordinary asset (used in business or held for sale in business), or when special option rules apply (notably certain sales to government for individuals).
In ordinary asset sales, taxable gain depends on substantiated basis and selling expenses, and withholding/VAT questions may also arise.
Even when deductions don’t reduce CGT, transaction costs (DST, transfer tax, fees, commissions) still materially affect net proceeds and compliance requirements.