Computing Capital Gains Tax on an Inherited Property Sale

When someone inherits land or a house in the Philippines and later decides to sell it, two different taxes come into play at two different points in time, and conflating them is the single biggest source of confusion. The estate tax is paid once, when the property passes from the deceased to the heirs. The capital gains tax (CGT) is paid separately, only if and when an heir later sells that inherited property to a third party. This article focuses on that second tax — how the 6% capital gains tax on the sale is actually computed, what else gets added to the bill, and how the process runs from signing the deed to getting a new title issued.

The 6% Rate, and What It Is Actually Charged On

Under Section 24(D) of the National Internal Revenue Code, the sale of real property located in the Philippines and classified as a capital asset is subject to a final capital gains tax of 6%. The word “gains” is misleading here — despite the name, the tax is not computed on your actual profit. It is computed on whichever is highest among three figures:

• The gross selling price stated in the Deed of Absolute Sale;
• The BIR zonal value for the property’s location and classification; and
• The fair market value shown on the current tax declaration issued by the city or municipal assessor.

The BIR takes the highest of the three, multiplies it by 6%, and that is the capital gains tax due — regardless of what the heirs actually inherited the property at, what they spent on it, or whether they sold it at a loss relative to its current zonal value. This is different from how income tax normally works, and it is why an heir who sells inherited land for less than its zonal value can still face a substantial tax bill.

A Worked Example

Suppose three siblings inherit a residential lot in Quezon City and sell it for ₱2,800,000. The BIR zonal value for that street is ₱3,000,000, and the assessor’s fair market value on the tax declaration is ₱2,500,000. Because the zonal value (₱3,000,000) is the highest of the three figures, that is the tax base — not the actual selling price. The capital gains tax due is ₱3,000,000 × 6% = ₱180,000, even though the siblings only received ₱2,800,000 for the property.

Documentary Stamp Tax and Other Costs on Top of CGT

Capital gains tax is not the only tax triggered by the sale. A documentary stamp tax (DST) is also due on the deed of conveyance, generally computed on the same tax base used for CGT (the highest of the selling price, zonal value, or assessor’s fair market value), currently at a rate of around 1.5%. Using the example above, the DST would be roughly ₱3,000,000 × 1.5% = ₱45,000.

On top of these two national taxes, expect:

• A local transfer tax imposed by the city or provincial treasurer, at a rate the local government unit sets within limits fixed by the Local Government Code — this varies from one LGU to another, so check with the treasurer’s office where the property is located;
• Registration fees charged by the Registry of Deeds to annotate the new title, which scale with the property’s value; and
• Incidental costs such as notarization of the deed of sale and, if the estate has not yet been settled, the cost of the extrajudicial settlement itself.

By long-standing practice (not a statutory rule), the seller customarily shoulders CGT while the buyer shoulders the transfer tax and registration fees, but this is negotiable and should be spelled out in the deed of sale or a separate agreement.

Step by Step: From Signing the Deed to a New Title

The process an heir goes through to sell inherited property and transfer a clean title to the buyer typically runs through these stages:

• 1. Settle the estate first. Before an heir can validly sell inherited property, the estate itself generally has to be settled — through extrajudicial settlement (if there is no will and the heirs agree) or judicial settlement (if there is a will, a minor heir, or a dispute) — and the estate tax paid, resulting in a BIR Certificate Authorizing Registration (eCAR) that allows the title to be transferred into the heirs’ names.
• 2. Sign and notarize the Deed of Absolute Sale. Once the property is titled in the heirs’ names, the sale itself is documented and notarized.
• 3. Pay CGT and DST within the deadlines. Capital gains tax is due within 30 days from notarization of the deed of sale, filed through BIR Form 1706. Documentary stamp tax is filed and paid separately, generally within the first days of the month following notarization.
• 4. Secure a second eCAR, this time for the sale. The BIR issues a Certificate Authorizing Registration for the sale transaction once CGT and DST are paid and all supporting documents are submitted.
• 5. Pay the local transfer tax and register with the Registry of Deeds. The buyer, or whoever is handling the transfer, pays the local transfer tax, then presents the eCAR, tax clearances, and deed to the Registry of Deeds to cancel the old title and issue a new one in the buyer’s name.
• 6. Update the tax declaration. The last step is having the assessor’s office issue a new tax declaration in the buyer’s name, which is needed for future real property tax payments.

If the Estate Tax Has Not Been Settled Yet

A common situation is that heirs want to sell inherited property but the estate tax on the original transfer from the decedent was never paid, sometimes because the decedent died years or even decades ago. In that case, the estate tax — plus whatever penalties, surcharges, and interest have accrued in the meantime — generally has to be settled and an eCAR obtained for the estate before a sale can be validly registered, because the Registry of Deeds will not transfer title without it. This is frequently the real bottleneck in selling inherited property — not the capital gains tax on the eventual sale, but years of unpaid estate tax that has to be cleared up first.

When Capital Gains Tax Might Not Apply

Two situations are worth flagging, though both are narrower than people assume:

• Principal residence exemption. The Tax Code allows an exemption from CGT if the property being sold is the seller’s actual principal residence and the full proceeds are used to acquire or construct a new principal residence within eighteen months, subject to notifying the BIR and complying with specific conditions. This rarely applies cleanly to inherited property sold by multiple heirs, since it generally requires the property to have been the seller’s own home, not simply an asset the heirs are liquidating.
• Ordinary asset, not capital asset. If the heir who inherited the property is engaged in the real estate business, or the property is used in a trade or business rather than held as an investment, it may be classified as an ordinary asset rather than a capital asset — in which case the sale is subject to regular income tax and creditable withholding tax rather than the flat 6% CGT. Most heirs selling a family home or an inherited residential lot will not fall into this category, but it is worth confirming with counsel or an accountant if the property was ever used commercially.

Common Mistakes That Delay or Inflate the Tax

• Selling before settling the estate. Attempting to sell directly from the decedent’s name, or relying on an informal agreement among heirs without an actual settlement document, leaves the buyer unable to register the sale.
• Missing the 30-day CGT deadline. Late payment triggers surcharges, interest, and compromise penalties on top of the tax itself, calculated from the notarization date regardless of when the parties actually get around to filing.
• Assuming the selling price controls. Sellers sometimes price the property based on what they think it is worth, only to discover the zonal value or assessor’s value is higher and controls the tax computation instead.
• Not accounting for all the heirs. If even one compulsory heir did not sign the extrajudicial settlement or deed of sale, the transfer can be challenged later, which is a separate and more serious problem than the tax computation itself.

Frequently Asked Questions

Is the 6% capital gains tax based on how much profit the heirs made? No. It is a final tax on the gross value of the sale — specifically the highest of the selling price, BIR zonal value, or assessor’s fair market value — not on the difference between what the property was worth when inherited and what it sold for.

Who is legally required to pay the capital gains tax, the seller or the buyer? The seller, meaning the heir disposing of the property, is the person the law makes liable for capital gains tax, though by custom the parties often agree the buyer will instead shoulder the local transfer tax and registration fees. This allocation is negotiable and should be written into the deed of sale.

Can heirs sell inherited property before paying the estate tax? In practice, no clean transfer into the buyer’s name is possible until the estate itself is settled and the BIR issues a Certificate Authorizing Registration for the estate, because the Registry of Deeds will not register a sale from an estate that has not cleared its own estate tax.

What happens if the capital gains tax is paid late? The BIR imposes a surcharge, monthly interest, and possibly a compromise penalty on top of the 6% tax itself, computed from the 30-day deadline after notarization of the deed of sale, so delays compound quickly.

This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.

If you have questions about your rights or options under Philippine law, our firm is available to assist. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.