Capital Gains Tax in the Philippines: A Complete Guide

When selling real estate in the Philippines, one of the most important taxes to understand is the Capital Gains Tax (CGT). This tax applies to the sale of capital assets, including properties, and is a key cost consideration for sellers. In this guide, we break down what Capital Gains Tax is, how it is calculated, and strategies to minimize your tax obligations.

What is Capital Gains Tax?

Capital Gains Tax is a tax imposed on the sale of real estate properties classified as capital assets. It is different from other taxes like the Documentary Stamp Tax (DST) or Creditable Withholding Tax (CWT), which apply in specific circumstances. CGT is set at a fixed rate of 6% of the property’s selling price, fair market value, or zonal value—whichever is higher.

How is Capital Gains Tax Calculated?

The Bureau of Internal Revenue (BIR) determines CGT based on the highest value among:

• Selling Price – The price stated in the Deed of Sale.
• Fair Market Value (FMV) – Determined by the local assessor.
• Zonal Value – Set by the BIR based on location and property type.

Formula: CGT = 6% x Higher of (Selling Price, Fair Market Value, Zonal Value)

Who Pays the Capital Gains Tax?

By law, the seller is responsible for paying CGT, which must be settled within 30 days after the sale is finalized. Failure to pay on time results in penalties and interest.

Exemptions from Capital Gains Tax

Some real estate transactions may be exempt from CGT, such as:

• Principal Residence Exemption: If the proceeds are used to acquire a new home within 18 months.
• Transfers through Inheritance: Properties inherited from family members are subject to estate tax instead of CGT.
• Corporate Real Estate Transactions: Sales by companies classified as engaged in real estate business may be subject to other tax rules.

Steps to Paying Capital Gains Tax

To settle your CGT, follow these steps:

1. Compute the 6% CGT based on the highest property value.
2. Prepare and complete BIR Form 1706.
3. Submit the form and pay the tax through an authorized BIR bank.
4. Obtain a Certificate Authorizing Registration (CAR) from the BIR as proof of payment.

Can You Reduce Your Capital Gains Tax?

While CGT is a fixed tax, sellers can legally reduce their tax obligations by:

• Proper Property Valuation: Consulting a real estate professional to ensure a fair market price.
• Taking Advantage of Tax Exemptions: If eligible, apply for the principal residence exemption.
• Timing the Sale: Selling at an optimal time to align with tax changes or property valuation adjustments.

Final Thoughts

Understanding Capital Gains Tax is essential for anyone selling property in the Philippines. By knowing how it is calculated, paid, and potentially reduced, you can make informed decisions and avoid unnecessary costs. Stay updated on legal requirements and compliance to ensure a smooth property transaction.