Introduction to Capital Gains Tax in Philippine Real Estate Transactions

In the Philippines, the sale of real property through a Deed of Absolute Sale (commonly referred to as a Deed of Sale) triggers various tax obligations under the National Internal Revenue Code (NIRC), as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law and subsequent regulations. Among these, Capital Gains Tax (CGT) is one of the most significant taxes imposed on such transactions. CGT is essentially a tax on the profit or gain realized from the sale, exchange, or other disposition of capital assets, including real property classified as capital assets.

This article provides a comprehensive overview of CGT in the context of a Deed of Sale, focusing on who bears the responsibility for payment—the buyer or the seller—along with the applicable rules, rates, exemptions, computation methods, filing procedures, penalties, and related considerations. It is based on Philippine tax laws, primarily Republic Act No. 8424 (NIRC) as amended, Bureau of Internal Revenue (BIR) rulings, and relevant jurisprudence. Note that tax laws can evolve, so consulting a tax professional or the BIR for the latest updates is advisable.

Defining Capital Gains Tax and Its Applicability

CGT is levied on the gain from the sale of real property that is not ordinarily held for sale in the course of trade or business (i.e., capital assets). Under Section 24(D) of the NIRC, as amended, CGT applies to:

Lands and buildings.
Shares of stock in domestic corporations (not dealt in the stock exchange).
Other capital assets.

For real estate transactions via a Deed of Sale, CGT is specifically imposed on the sale of real property located in the Philippines. The tax is final and withholding in nature, meaning it is computed and paid at the time of the transaction, and no further income tax is due on the gain in the seller's annual income tax return.

Key Distinction: Capital Assets vs. Ordinary Assets

Not all real property sales attract CGT. The classification of the property is crucial:

Capital Assets: Properties not used in trade or business, such as residential lots or vacation homes. Sales of these are subject to CGT.
Ordinary Assets: Properties held for sale in the ordinary course of business (e.g., inventory of a real estate developer). Gains from these are treated as ordinary income, subject to regular income tax rates (up to 35% for individuals or 30% for corporations), not CGT.

If the seller is habitually engaged in real estate dealings (e.g., more than two sales in a year), the BIR may reclassify the property as an ordinary asset, shifting the tax treatment.

Who Pays the Capital Gains Tax: Buyer or Seller?

In Philippine law, the seller is primarily responsible for paying the CGT. This is explicitly stated in BIR regulations, such as Revenue Regulations (RR) No. 7-2003 and RR No. 8-2013. The rationale is that CGT is a tax on the income or gain derived by the seller from the disposition of their asset.

Seller's Obligation: The seller must compute, withhold (if applicable), and remit the CGT to the BIR. In practice, the buyer often assists by withholding the tax from the purchase price and remitting it on behalf of the seller, but the legal liability remains with the seller.
Buyer's Role: The buyer does not pay CGT. However, the buyer may be required to withhold CGT as a withholding agent under certain circumstances (e.g., if the seller is a non-resident). More commonly, the buyer shoulders other taxes and fees associated with the transfer, such as Documentary Stamp Tax (DST), transfer taxes, and registration fees.

Scenarios Where Liability Shifts or Is Shared

While the seller is the default payer, exceptions and nuances exist:

Non-Resident Sellers: If the seller is a non-resident alien or foreign corporation, the buyer becomes the withholding agent and must withhold 6% CGT on the gross selling price or fair market value (FMV), whichever is higher, and remit it to the BIR (Section 25 of the NIRC).
Corporate Sellers: For domestic corporations, CGT is still the seller's responsibility, but if the corporation is engaged in real estate as a business, it might fall under ordinary income tax instead.
Installment Sales: If the sale is on installment (initial payment ≤ 25% of selling price), the seller can opt for installment reporting of CGT, paying proportionally as payments are received (RR No. 17-2003).
Exchange of Properties: In barter or exchange, both parties may be considered sellers, each liable for CGT on their respective gains.
Foreclosure or Dacion en Pago: In mortgage foreclosures or dacion en pago (payment in kind), the transfer is deemed a sale, and the mortgagor (original owner) is the seller liable for CGT.
Inheritance or Donation: CGT does not apply to transfers by succession or donation, as these are subject to estate tax or donor's tax instead. However, if the heir or donee later sells the property, they become the seller liable for CGT.

Agreement Between Parties

Parties to a Deed of Sale can negotiate who shoulders the CGT in their contract. For instance, the buyer might agree to pay the CGT to sweeten the deal. However, this is a contractual arrangement and does not alter the legal obligation under tax law—the BIR will still hold the seller accountable if the tax is unpaid. Such agreements should be clearly stipulated in the Deed of Sale to avoid disputes.

CGT Rate and Computation

The CGT rate for real property sales is a flat 6%, applied to the gross selling price (GSP) or the zonal value (ZV) or fair market value (FMV) as determined by the BIR or local assessor, whichever is higher. This ensures the tax is based on the property's true value, preventing underdeclaration.

Formula for CGT

CGT = 6% × (Higher of: GSP, BIR Zonal Value, or Assessor's FMV)

Gross Selling Price (GSP): The amount stated in the Deed of Sale, including cash, fair value of non-cash considerations, and assumed liabilities.
Zonal Value (ZV): BIR-published values per Revenue District Office (RDO), updated periodically.
Fair Market Value (FMV): Assessed value by the local government unit (LGU) for real property tax purposes.

Deductible Costs

Unlike some jurisdictions, Philippine CGT does not allow deduction of the property's acquisition cost or improvements to compute a "net gain." It's a presumptive tax on the entire higher value, simplifying computation but potentially taxing unrealized appreciation.

Examples of Computation

Basic Sale: Property sold for PHP 5,000,000; ZV is PHP 6,000,000; FMV is PHP 5,500,000. CGT = 6% × PHP 6,000,000 = PHP 360,000 (paid by seller).
Loss Scenario: If GSP is PHP 4,000,000 but ZV is PHP 5,000,000, CGT is still 6% × PHP 5,000,000 = PHP 300,000, even if the seller incurs a loss.
Installment: Initial payment PHP 1,000,000 on a PHP 5,000,000 sale (ZV higher at PHP 6,000,000). Initial CGT = (1,000,000 / 6,000,000) × 360,000 = PHP 60,000.

Exemptions and Relief Measures

Several exemptions relieve the seller from CGT:

Principal Residence Exemption (Section 24(D)(2), NIRC): Sale of the seller's principal residence is exempt if:
- The proceeds are fully utilized to acquire or construct a new principal residence within 18 months.
- The BIR is notified via a sworn declaration within 30 days of sale.
- Maximum exemption applies to sales up to PHP 2,000,000 (prorated for higher values).
- If proceeds are not fully used, partial CGT applies proportionally.
Sale to Government: Exempt if for public use or under expropriation.
Corporate Reorganizations: Mergers, consolidations, or spin-offs may qualify for tax-free exchanges under Section 40(C)(2).
Low-Value Transactions: No specific threshold, but micro-transactions might be de minimis.
Senior Citizens and PWDs: No direct exemption for CGT, but related laws (e.g., RA 9994) provide discounts on other taxes.

To claim exemptions, the seller must secure a Certificate Authorizing Registration (CAR) from the BIR, which confirms tax clearance.

Other Taxes in a Deed of Sale: Buyer's Responsibilities

While the seller handles CGT, the buyer typically pays:

Documentary Stamp Tax (DST): 1.5% of the higher of GSP, ZV, or FMV (Section 196, NIRC). Paid by the buyer or as agreed.
Transfer Tax: 0.5% to 0.75% of GSP or FMV, paid to the LGU (Local Government Code).
Registration Fees: Variable, based on property value, paid to the Registry of Deeds.
Value-Added Tax (VAT): 12% if the seller is VAT-registered and the property is an ordinary asset (e.g., developers).

If the sale exceeds PHP 3.2 million (as adjusted), expanded withholding tax (EWT) may apply.

Filing and Payment Procedures

Timeline: CGT must be paid within 30 days from the notarization of the Deed of Sale (BIR Form 1706).
Withholding: If applicable, the buyer withholds and remits using BIR Form 1606.
Documents Required:
- Deed of Sale.
- Tax Declaration.
- Title documents.
- Proof of ZV/FMV.
- Sworn declaration for exemptions.
CAR Issuance: The BIR issues a CAR upon payment, necessary for title transfer at the Registry of Deeds.

Failure to secure a CAR blocks registration, leaving the buyer with incomplete title.

Penalties for Non-Compliance

Surcharge: 25% for late filing/payment; 50% for willful neglect.
Interest: 12% per annum (post-TRAIN rate).
Compromise Fees: Variable, based on violation.
Criminal Penalties: For tax evasion, imprisonment and fines under Section 255 of the NIRC.

The BIR can audit transactions up to 3 years (or 10 years for fraud) and impose assessments.

Jurisprudence and BIR Rulings

Key cases:

CIR v. Fort Bonifacio Development Corp. (G.R. No. 175707): Clarified that undeveloped land sold by a developer is an ordinary asset, not subject to CGT.
CIR v. Spouses Constantino (G.R. No. 220508): Upheld the use of ZV over GSP for CGT base.
BIR Ruling No. 025-2018: Reiterated exemption rules for principal residences.

Practical Tips for Buyers and Sellers

Due Diligence: Verify property classification and values before signing.
Tax Planning: Sellers can time sales or use exemptions to minimize liability.
Professional Assistance: Engage lawyers, accountants, or real estate brokers familiar with BIR procedures.
Inflation Adjustments: ZV and thresholds are periodically updated; check the BIR website.
Digital Transactions: With eBIRForms, filing is now online for efficiency.

Conclusion

In summary, Capital Gains Tax in a Philippine Deed of Sale is unequivocally the seller's burden, calculated at 6% on the highest value metric, with exemptions available for principal residences and other qualified transactions. Buyers, while not liable for CGT, must navigate their own tax obligations to complete the transfer. Understanding these rules ensures compliance, avoids penalties, and facilitates smooth real estate dealings. For personalized advice, consult qualified professionals or the BIR.