Capital gains tax (CGT) is often a point of confusion for many Filipinos looking to sell their property. Understanding CGT on sale of property ensures you remain compliant with Philippine law while also maximizing your potential returns.

In this comprehensive blog post, we will discuss everything you need to know about capital gains tax in the Philippines, including its legal basis, calculations, exemptions, processes, and best practices. Whether you’re a first-time seller or a seasoned real estate investor, this guide will help you navigate the CGT landscape confidently.

What Is Capital Gains Tax (CGT)?

Capital gains tax (CGT) is a tax levied on the profit realized from the sale or exchange of a capital asset. In the Philippines, real estate properties (such as land, houses, or condominiums) held by individuals are considered capital assets unless classified otherwise by law. CGT on sale of property is imposed when an individual sells real estate, typically at a rate of 6% based on the property’s gross selling price or its fair market value (FMV)—whichever is higher.

Why It Matters

  • Legal Compliance: Paying the correct CGT is mandatory under Philippine law.
  • Transaction Requirements: You often need proof of CGT payment to transfer the title to the buyer.
  • Financial Clarity: Factoring CGT into your calculations helps you set a fair selling price.

Understanding CGT early in the selling process allows you to plan your finances and obligations better.

Legal Basis for CGT on Sale of Property

The primary sources of law concerning CGT in the Philippines include:

  1. National Internal Revenue Code (NIRC) – The basic tax framework, as amended by subsequent laws.
  2. Revenue Regulations by the Bureau of Internal Revenue (BIR) – Detailed guidelines on tax implementation.
  3. TRAIN Law (Republic Act No. 10963) – Enacted in 2018, it introduced various tax reforms, though the CGT rate for the sale of real property classified as a capital asset remained at 6%.

Who Imposes CGT?

The Bureau of Internal Revenue (BIR) administers and collects the CGT on real estate transactions. Once a property sale is completed, the BIR requires the seller (or their representative) to file the appropriate returns and pay the corresponding tax due.

Penalties for Non-Compliance

Failing to file and pay the CGT within the prescribed deadlines can result in:

  • Surcharges
  • Interest
  • Compromises or penalties

These penalties can significantly increase your total tax liability.

How Capital Gains Tax Is Calculated

CGT Rate

For individual taxpayers selling real property classified as a capital asset, the CGT rate is 6% of the property’s gross selling price (GSP), fair market value (FMV), or zonal value, whichever is higher.

Determining the Tax Base

  • Gross Selling Price (GSP): The actual selling price based on the Deed of Sale.
  • Fair Market Value (FMV): The property’s value as determined by the municipal or city assessor. This value appears on the Tax Declaration.
  • Zonal Value: The property’s value set by the BIR, often published in official BIR bulletins.

The CGT base is the highest among GSP, FMV, and zonal value. For instance, if your property’s GSP is PHP 3,500,000, but its zonal value is PHP 4,000,000, the BIR will use the higher amount (PHP 4,000,000) to compute the 6% tax.

Sample Computation

Suppose:

  • GSP = PHP 3,500,000
  • FMV = PHP 3,800,000
  • Zonal Value = PHP 4,000,000

Step 1: Identify the highest value.

  • Highest among GSP (3.5M), FMV (3.8M), or zonal (4.0M) is PHP 4,000,000.

Step 2: Calculate 6% of the highest value.

  • CGT = 6% x PHP 4,000,000
  • CGT = PHP 240,000

Step 3: Payment.

  • This PHP 240,000 is the capital gains tax due.

CGT Exemptions and Special Considerations

Principal Residence Exemption

One key exemption to note is the sale of your principal residence. Under certain conditions, if you use the proceeds to acquire or construct a new home within 18 months from the date of sale, you may be exempt from capital gains tax. However, this is subject to specific requirements:

  1. You must notify the BIR that the sale proceeds will be used to purchase a new principal residence.
  2. The total amount from the sale must be utilized to avoid partial taxation.
  3. Proof of acquisition or construction of the new residence must be submitted to the BIR.

Properties Owned by Corporations

When properties are held by corporations, a different tax regime may apply. Corporations or businesses do not typically pay “capital gains tax” per se, but instead they are subject to regular income tax or creditable withholding tax on their sales. This post, however, focuses on individual taxpayers selling capital assets.

Foreclosures

In cases of foreclosure, certain rules differ, especially if the property is repossessed by the lender. Depending on the type of foreclosure (judicial or extrajudicial), CGT obligations may shift. Typically, the BIR might treat the foreclosure as a sale transaction if you no longer have the right to redeem the property.

Inherited or Donated Properties

  • Inherited Property: If you inherit property, you become liable for estate tax (not CGT) upon the death of the previous owner. However, if you decide to sell the inherited property later, the subsequent sale is subject to CGT.
  • Donated Property: A donation triggers donor’s tax at the time of donation. But any future sale of that property is treated like a normal sale for CGT purposes.

Step-by-Step Process for Paying CGT

Paying the correct CGT is crucial to finalizing your property transaction. Below is a step-by-step guide to help you navigate the process efficiently.

Step 1: Gather Essential Documents

  1. Deed of Sale (Notarized)
  2. Certified True Copy of Title (Transfer Certificate of Title for land or Condominium Certificate of Title for condos)
  3. Tax Declaration (Real Property Tax Declaration for the land and/or improvement)
  4. BIR Zonal Valuation Table (To determine the zonal value)
  5. Proof of Identification (Valid government-issued ID for both buyer and seller)

Step 2: Compute the Tax

Use the formula discussed earlier to determine your CGT liability. You may also consult a tax professional or the BIR for a second opinion if your property has unique nuances.

Step 3: Fill Out the Required BIR Forms

  • BIR Form 1706 (Capital Gains Tax Return) is the primary form for individual taxpayers selling real property.
  • BIR Form 2000-OT for Documentary Stamp Tax (DST) might also be necessary. DST is usually 1.5% of the property’s highest value among GSP, FMV, and zonal value.

Step 4: Proceed to an Authorized Agent Bank (AAB) or BIR Office

Bring your completed forms and supporting documents to an Authorized Agent Bank. If there is no AAB available in your area, you can pay directly at the Revenue District Office (RDO) where the property is located.

Step 5: Secure the Receipt and Documentary Evidence

Once you pay the tax, you will receive:

  • A duly stamped BIR Form 1706 (proof of CGT payment)
  • Official Receipt from the bank or BIR

Keep these documents as they are required for the issuance of a Certificate Authorizing Registration (CAR), which you need to transfer the title to the buyer.

Step 6: File for the Certificate Authorizing Registration (CAR)

Submit the following to the RDO:

  • Duly stamped BIR Form 1706
  • Official Receipt
  • Deed of Sale
  • Other supporting documents (Title, Tax Declaration, etc.)

Once the BIR validates your payment and documents, they will issue the CAR, which is necessary to effect the transfer of title from the seller to the buyer.

Step 7: Transfer the Title

With the CAR in hand, you can now go to the Register of Deeds to officially transfer the title to the buyer. This step also typically involves paying registration fees.

Common Pitfalls to Avoid

1. Underreporting the Selling Price

Some sellers may be tempted to declare a lower selling price to reduce CGT. This practice is illegal and can result in severe penalties, including surcharges, fines, or even criminal charges.

2. Missing the Filing Deadline

The CGT must be filed within 30 days from the date of the sale (or exchange) of the property. Delays in filing result in penalties and interest charges.

3. Ignoring Zonal or Fair Market Values

Relying solely on the contract price and ignoring the property’s zonal or fair market value can lead to errors. Remember that the basis for CGT is the highest among the selling price, zonal value, or fair market value.

4. Failing to Keep Adequate Documentation

Ensure you keep a secure record of all documents—Deed of Sale, tax returns, receipts, etc. BIR offices may request additional proof, especially if something seems amiss.

5. Overlooking Additional Taxes

Aside from CGT, you will often need to pay documentary stamp tax (DST). The buyer, on the other hand, may be subject to transfer tax and other related fees. Clarify who pays what in the Deed of Sale to avoid confusion.

Best Practices for Selling Property in the Philippines

  1. Consult Professionals
    Engage a licensed real estate broker, attorney, or accountant early in the process to ensure compliance with relevant laws and to avoid costly mistakes.
  2. Set a Realistic Price
    Research the zonal values and property trends in your area. Pricing your property right can attract serious buyers and speed up the transaction.
  3. Plan for Taxes and Fees
    Factor in not just CGT, but also other fees like DST, notarial fees, and registration fees when finalizing your sale price.
  4. Use the Proceeds Wisely
    If you qualify for the principal residence exemption, reinvest the proceeds as intended to enjoy partial or full exemption.
  5. Complete Paperwork Promptly
    Finalize the deed, file taxes within 30 days, and secure a Certificate Authorizing Registration. Avoid unnecessary delays that can lead to penalties.
  6. Maintain Clear Communication
    Always communicate with the buyer regarding the steps you are taking. Transparency builds trust, which is crucial for smooth transactions.

Frequently Asked Questions About CGT on Sale of Property

1. What happens if I don’t pay CGT?

You become liable for penalties and interest, and you won’t be able to secure a Certificate Authorizing Registration (CAR), which is necessary to transfer the title.

2. Are there any other taxes I need to pay when selling my property?

Yes, documentary stamp tax (DST) at 1.5% usually applies. You might also encounter local transfer taxes and registration fees.

3. Is CGT a one-time payment?

Yes, it is generally a one-time payment tied to the sale or exchange of real property classified as a capital asset. It must be paid within 30 days of the transaction date.

4. Can I negotiate the CGT payment with the buyer?

Traditionally, the seller is responsible for paying CGT. However, parties can negotiate payment terms as they see fit, provided the tax is paid correctly and on time.

5. Does CGT still apply if I’m selling the property below the fair market value?

Yes, CGT will still apply, and it will be based on the highest amount among the gross selling price, fair market value, or zonal value, regardless of your declared selling price.

6. Do I have to pay CGT if I’m simply transferring the property to a family member without payment?

This transaction may be subject to donor’s tax instead of CGT, depending on whether the property is being sold for a price or given as a gift.

7. How does the principal residence exemption work in practice?

If you sell your primary home and use the proceeds to buy or build another principal residence within 18 months, you can apply for CGT exemption. You must notify the BIR beforehand and provide proof of the subsequent purchase or construction.

Key Takeaways

  1. CGT Rate: The capital gains tax for real property classified as a capital asset in the Philippines is 6% of the highest among the gross selling price, zonal value, or fair market value.
  2. Filing Deadline: You must file and pay CGT within 30 days of finalizing the sale.
  3. Required Documents: Prepare all relevant paperwork, including the Deed of Sale, BIR forms, and payment receipts.
  4. Common Pitfalls: Avoid underreporting the sale price and missing deadlines to prevent penalties.
  5. Professional Assistance: Consult real estate brokers, lawyers, or accountants to ensure compliance and a smoother transaction.

Being aware of these factors can help you make informed decisions, minimize tax liabilities, and avoid legal complications.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute professional legal or tax advice. Laws and regulations can change, and their application can vary based on individual circumstances. For personalized guidance on CGT on sale of property or any other tax and legal matters, you should consult a qualified lawyer, accountant, or tax professional. The author and publisher disclaim any liability arising from the use or misuse of the information contained herein.