Below is a comprehensive discussion of capital gains tax (CGT) on real estate in the Philippines, structured as a legal article. This information is for general reference only and should not substitute individualized legal advice from a qualified attorney or tax professional.

1. Overview of Capital Gains Tax in the Philippines

Capital gains tax (CGT) is a tax imposed on the gain presumed to have been realized by a seller from the sale, exchange, or other disposition of real property classified as a capital asset. The legal basis for the imposition of CGT in the Philippines is found in the National Internal Revenue Code (NIRC), as amended, along with various regulations and rulings issued by the Bureau of Internal Revenue (BIR).

1.1. Distinction: Capital Asset vs. Ordinary Asset

Under Philippine tax laws, properties are classified either as ordinary assets or capital assets. Real property is considered a capital asset if it is not used in trade or business (e.g., personal property for personal use or investment). Conversely, ordinary assets refer to those used in the ordinary course of trade or business (e.g., properties held for sale by real estate dealers or used in business operations).

Capital Assets: Generally subject to 6% capital gains tax on the presumed gain (as explained below).
Ordinary Assets: Typically subject to ordinary income tax or Value-Added Tax (VAT), depending on the specifics.

Most individual real estate transactions by private persons, not in the real estate business, involve capital assets and therefore trigger capital gains tax.

2. Rate and Basis of Capital Gains Tax

2.1. Current CGT Rate

The CGT on the sale, exchange, or other disposition of real property classified as a capital asset is 6% of either:

The gross selling price (GSP),
The fair market value (FMV) as determined by the Commissioner of Internal Revenue (i.e., the property’s zonal value),
Or the assessed value of the property,

whichever is highest.

Example: If a property is sold for PHP 2,000,000 and the BIR-zonal value is PHP 2,500,000, the 6% CGT will be computed on PHP 2,500,000 (the higher amount).

2.2. Why the 6% Is Considered a “Final” Tax

The 6% rate is deemed a final tax. Once paid, it generally satisfies all income tax obligations relating to that sale. In other words, you do not combine the proceeds or the gain with your regular taxable income subject to the graduated income tax rates.

3. When and How to Pay the Capital Gains Tax

3.1. Deadline for Payment

Under Philippine regulations, the capital gains tax on real property must be paid within 30 days from the date of the sale or disposition. Failure to pay within this period can result in penalties, surcharges, and interest.

3.2. Documentary Requirements for Filing

To pay the CGT, taxpayers typically must submit:

BIR Form 1706 (Capital Gains Tax Return) – used specifically for CGT on real property.
Notarized Deed of Sale or Deed of Conveyance – proving the transfer of ownership.
Certified True Copy of the Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT) – from the Registry of Deeds.
Tax Declaration – current tax declaration of the real property.
Zonal Valuation – to verify fair market or zonal value used in computing the tax base.
Additional Supporting Documents – such as IDs of seller and buyer, proof of payment of real property tax, etc.

Once the CGT return (BIR Form 1706) is filed, the taxpayer pays the computed amount at:

Authorized Agent Banks (AABs) within the Revenue District Office (RDO) having jurisdiction over the location of the property, or
The BIR’s Electronic Filing and Payment System (eFPS), if enrolled, or
The Revenue Collection Officer if there is no authorized bank in the area.

3.3. Issuance of Certificate Authorizing Registration (CAR)

After payment of CGT (and the documentary stamp tax), the BIR issues a Certificate Authorizing Registration (CAR) or an Electronic Certificate Authorizing Registration (eCAR), which is required by the Registry of Deeds to transfer the title from the seller’s name to the buyer’s name.

4. Other Taxes and Fees Related to Real Estate Transactions

It is important to distinguish the 6% CGT from other taxes and fees associated with real estate transactions. Even if CGT is already paid, one must also consider:

Documentary Stamp Tax (DST)
- Rate: 1.5% of either the gross selling price or the fair market value (whichever is higher).
- Typically filed using BIR Form 2000-OT (One-Time Transaction).
- Payment deadline is also within 5 days after the close of the month when the taxable document (Deed of Sale) is signed.
Transfer Tax (Local Government)
- Imposed by the local government unit (LGU) of the province or city where the property is located.
- Rate: Generally up to 0.50% to 0.75% of the property value, depending on the local ordinance.
Registration Fees
- Payable to the Registry of Deeds for issuance of a new certificate of title.
- Computed based on the schedule of fees under the Land Registration Authority (LRA).
Real Property Tax (RPT)
- Imposed by the LGU, usually paid annually by the owner. Any arrears typically need to be cleared before title transfer.

5. Special Considerations and Exemptions

5.1. Principal Residence Exemption

Section 24(D)(2) of the NIRC, as amended, provides a one-time tax exemption under certain conditions for the sale of a principal residence. If an individual (and the property is under his/her name) sells his/her principal residence and uses the proceeds to acquire or construct a new principal residence within 18 months from the sale, the portion of the gains used for the new residence may be exempt from CGT. Key requirements include:

The seller must notify the BIR within 30 days of the sale about the intention to avail of the exemption.
The new property must be purchased or constructed within 18 months of the sale date.
This exemption can only be used once every 10 years.

Failure to invest the proceeds in full or partially within the prescribed period leads to partial or total disqualification from the exemption, resulting in CGT liabilities plus interest, if applicable.

5.2. Inheritance and Donation

In cases of transfers through inheritance or donation, the appropriate taxes are estate tax or donor’s tax, not capital gains tax. However, if the heir or donee decides to sell the inherited or donated property later on and it qualifies as a capital asset, the 6% CGT rule applies at the time of actual sale.

5.3. Corporate Ownership and Real Estate Dealers

If the seller is a real estate dealer or a business entity habitually engaged in the real estate business, the property may be treated as an ordinary asset rather than a capital asset. In such a scenario:

The relevant taxes could be regular corporate income tax or graduated income tax rates plus 12% VAT (if the seller is VAT-registered and the transaction is subject to VAT), instead of the 6% CGT.
Careful analysis is needed to determine whether the property is capital or ordinary.

6. Common Pitfalls and Practical Tips

Late Filing and Payment
- Taxpayers often miss the 30-day deadline. Late or non-payment triggers 25% surcharge, 12% annual interest, plus possible compromise penalty.
- Always ensure the documentary requirements are ready to facilitate a timely filing.
Incorrect Valuation
- Under-declaring the selling price is common but illegal. The BIR calculates CGT based on whichever is higher: the declared selling price or the zonal/fair market value.
- To avoid disputes, sellers must check current zonal valuations. Falsification or misrepresentation may incur penalties and potential criminal liability.
Overlooking Required Documents
- Ensure that deeds of sale are properly notarized and that supporting documents (TCT, tax declarations, IDs, etc.) are complete. Missing documents delay the issuance of the Certificate Authorizing Registration (CAR).
Failure to Avail of Principal Residence Exemption on Time
- If planning to use the proceeds to buy or build a new home, notify the BIR within 30 days and observe the 18-month reinvestment period. Non-compliance voids the exemption.
Confusion Over Tax Classifications
- Some property owners incorrectly assume they owe CGT when in fact the property is an “ordinary asset” subject to regular income tax or VAT. Seek professional advice, particularly if the seller is engaged in the real estate business or sells property frequently.

7. Recent Developments and Reforms

The TRAIN Law (Republic Act No. 10963) introduced some adjustments to personal income tax brackets and certain deductions. However, the 6% CGT rate on real property (capital assets) remained unchanged.
Ongoing BIR issuances and local ordinances may periodically revise zonal valuations or implement new requirements for the issuance of CAR/eCAR. Taxpayers should stay current with the latest BIR guidelines.

8. Summary of Key Points

Capital Gains Tax Rate: 6% on the higher of (a) gross selling price, (b) zonal value, or (c) assessed value.
Deadline: Must be paid within 30 days of the sale using BIR Form 1706.
Supporting Taxes: Documentary Stamp Tax (1.5%), local transfer tax (varies by LGU), registration fees, and any real property tax arrears.
Principal Residence Exemption: Available for qualifying sellers subject to strict conditions and deadlines.
Exclusions: Inheritance and donation fall under estate or donor’s tax. Business or frequent sellers of real estate may be subject to different tax treatments.
Penalties: Surcharge, interest, and fines apply for late or non-compliance.

Conclusion

Understanding capital gains tax in Philippine real estate transactions requires a clear grasp of the legal classification of the property, the basis and rate of taxation, and the procedures and deadlines prescribed by the BIR and local government units. Sellers of real property classified as a capital asset are obliged to pay 6% CGT within 30 days of the transaction, along with other transactional taxes like DST and local transfer tax. Careful documentation, valuation, and timely compliance are crucial to avoid penalties.

For specific situations—especially concerning business classification, principal residence exemptions, or complex ownership structures—it is best to consult a licensed attorney or tax professional. The legal landscape continually evolves through new laws, regulations, and issuances; staying abreast of these changes ensures that parties remain compliant and avoid costly tax disputes.