Capital Gains Tax: The 6% Final Tax on Real Property
Understand the 6% capital gains tax on sale of real property classified as capital asset. Learn how to determine the tax base, when it applies, and who is liable.
The 6% CGT Rate and Tax Base
“A final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales.”
What This Means
The capital gains tax is a final tax of 6% imposed on the sale of real property classified as a capital asset. The tax base is the gross selling price or the current fair market value (zonal value or assessed value), whichever is higher. This means even if you sell below market value, the BIR will compute CGT based on the higher benchmark. The tax is called "presumed" because the law assumes a gain was realized regardless of actual profit or loss.
- Rate is a flat 6%. not graduated, not based on actual gain
- Tax base: gross selling price OR fair market value, whichever is HIGHER
- Fair market value = BIR zonal value or assessor's FMV, whichever is higher
- Applies to pacto de retro sales and conditional sales too
- It is a FINAL tax. not creditable against income tax
Real-World Scenario
Pedro sells his residential lot (a capital asset) to Maria for P2,000,000. The BIR zonal value of the property is P2,500,000, and the assessed value per the tax declaration is P1,800,000.
How much is the capital gains tax, and what is the tax base?
Capital Asset vs. Ordinary Asset Classification
“The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.”
What This Means
Whether a property is a capital asset or ordinary asset determines which tax applies. Capital assets are taxed at 6% CGT (final). Ordinary assets. properties used in trade/business or held for sale to customers. are subject to regular income tax and creditable withholding tax instead. For real estate brokers and developers, the properties they sell are ordinary assets since selling real estate IS their business. For individual owners selling personal property not used in business, it is typically a capital asset.
- Capital asset = NOT used in trade or business, NOT inventory, NOT for sale to customers
- Ordinary asset = used in business, held for sale, or depreciable business property
- Developer selling lots = ordinary asset (real estate is their business)
- Individual selling personal home = capital asset (6% CGT applies)
- Broker selling own property NOT part of inventory = capital asset
Real-World Scenario
ABC Realty Corporation, a real estate developer, sells a lot in their subdivision project for P5,000,000. Meanwhile, their office manager sells her personal condominium unit (which she has lived in for 10 years) for P4,000,000.
Which transaction is subject to the 6% CGT?
Filing Deadline and Payment Requirements
“Within thirty (30) days following each sale or other disposition of real property, the seller shall file a return with and pay the tax due to the Commissioner or to the authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality where the property is located.”
What This Means
The CGT must be filed and paid within 30 days from the date of notarization of the deed of sale. The return is filed with the BIR Revenue District Office (RDO) where the property is located. not where the seller resides. Late filing results in surcharges (25% or 50%), interest (double the legal interest rate per annum), and compromise penalties. The CGT must be paid BEFORE the BIR will issue a Certificate Authorizing Registration (CAR), which is needed to transfer the title.
- Deadline: 30 days from date of notarization of the Deed of Sale
- File with BIR RDO where the PROPERTY is located
- Use BIR Form 1706 (Capital Gains Tax Return)
- Late payment: 25% surcharge + interest + compromise penalty
- CAR (Certificate Authorizing Registration) won't be issued until CGT is paid
Real-World Scenario
Elena sold her vacant lot in Cavite on March 1. The deed of absolute sale was notarized on March 5. She lives in Makati and plans to file the CGT return at the Makati RDO on April 10.
Is Elena filing correctly and on time?
Frequently Asked Questions
Who pays the capital gains tax. buyer or seller?
Under the NIRC, the seller is legally liable for the CGT since it is a tax on the seller's presumed gain. However, in practice, buyer and seller may agree contractually on who shoulders it. Regardless of private agreements, the BIR will hold the seller responsible if the tax remains unpaid.
Is the 6% CGT based on actual profit from the sale?
No. The 6% CGT is based on the gross selling price or fair market value (whichever is higher), NOT on actual gain. Even if you sell at a loss, the tax still applies at 6% of the higher value. The law "presumes" a capital gain was realized from the transaction.
Can I claim exemption from CGT if I use the proceeds to buy a new home?
Yes, under Section 24(D)(2) of the NIRC. If you sell your principal residence and use the full proceeds to buy or build a new principal residence within 18 months, you can claim a one-time CGT exemption. This exemption can only be availed once in a lifetime, and you must notify the BIR within 30 days of the sale.