Description

Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller
from the sale, exchange, or other disposition of capital assets located in the Philippines,
including pacto de retro sales and other forms of conditional sale.

Final Capital Gains Tax for Onerous Transfer of Real Property Classified as Capital Assets
(Taxable and Exempt)

Tax Form
BIR Form 1706 – Final Capital Gains Tax Return (For Onerous Transfer of Real Property Classified as
Capital Assets -Taxable and Exempt)

Documentary Requirements
1) One original copy and one photocopy of the Notarized Deed of Sale or Exchange

2) Photocopy of the Transfer Certificate of Title; Original Certificate of Title; or Condominium

Certificate of Title

3) Certified True Copy of the tax declaration on the lot and/or improvement during nearest time of
sale

4) “Certificate of No Improvement” issued by the Assessor’s office where the property has no
declared improvement, if applicable or Sworn Declaration/Affidavit of No Improvement by at least
one (1) of the transferees

5) Copy of BIR Ruling for tax exemption confirmed by BIR, if applicable

6) Duly approved Tax Debit Memo, if applicable

7) “Sworn Declaration of Interest” as prescribed under Revenue Regulations 13-99, if the transaction
is tax-exempt

8) Documents supporting the exemption

Additional requirements may be requested for presentation during audit of the tax case depending
upon existing audit procedures.

Procedures
File the Capital Gains Tax return in triplicate (two copies for the BIR and one copy for the taxpayer)
with the Authorized Agent Bank (AAB) in the Revenue District where the property is located. In
places where there are no AAB, the return will be filed directly with the Revenue Collection Officer or
Authorized City or Municipal Treasurer.

Tax Rates
For real property - 6%.

Deadline
Within 30 days after each sale, exchange, transfer or other disposition of real property.
Frequently Asked Questions

1) What is meant by capital asset?

Capital asset means property held by the taxpayer (whether or not connected with his trade or
business), but does not include –

a) 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

b) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business; or

c) property used in the trade or business of a character which is subject to the allowance for
depreciation provided in subsection (F) of Sec. 34 of the Code; or

d) real property used in trade or business of the taxpayer.

2) What is meant by ordinary asset?

Ordinary asset refers to all properties specifically excluded from the definition of capital assets under
Sec. 39 (A)(1) of the NIRC.

3) What is meant by real property?

Real property shall have the same meaning attributed to that term under Article 415 of Republic Act
No. 386, otherwise known as the “Civil Code of the Philippines.

4) What does a real estate dealer refer to?

A real estate dealer refers to any person engaged in the business of buying and selling or exchanging
real properties on his own account as a principal and holding himself out as a full or part-time dealer
in real estate.

5) What does a real estate developer refer to?

Real estate developer refers to any person engaged in the business of developing real properties into
subdivisions, or building houses on subdivided lots, or constructing residential or commercial units,
townhouses and other similar units for his own account and offering them for sale or lease.

6) What does a real estate lessor refer to?

Real estate lessor refers to any person engaged in the business of leasing or renting real properties
on his own account as a principal and holding himself out as a lessor of real properties being rented
out or offered for rent.

7) Who are considered engaged in the real estate business?

Taxpayers who are considered engaged in the real estate business refer collectively to real estate
dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of
engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage
in the real estate business shall be deemed to be engaged in the real estate business.

8) Who are considered not engaged in the real estate business?

Taxpayers who are considered not engaged in the real estate business refer to persons other than
real estate dealers, real estate developers and/or real estate lessors.

9) Who are considered habitually engaged in the real estate business?

Real estate dealers or real estate developers who are registered with the Housing and Land Use
Regulatory Board (HULRB) or HUDCC

10)How can you determine whether a particular real property is a capital asset or an ordinary asset?

a) Real properties shall be classified with respect to taxpayers engaged in the real estate business as
follows:

i) All real properties acquired by the real estate dealer shall be considered as ordinary assets.

ii) All real properties acquired by the real estate developer, whether developed or undeveloped as of
the time of acquisition, and all real properties which are held by the real estate developer primarily
for sale or for lease to customers in the ordinary course of his trade or business or which would
properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and
all real properties used in the trade or business, whether in the form of land, building, or other
improvements, shall be considered as ordinary assets.

iii) All real properties of the real estate lessor, whether land, building and/or improvements, which
are for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or
business shall likewise be considered as ordinary assets.

iv) All real properties acquired in the course of trade or business by a taxpayer habitually engaged in
the sale of real property shall be considered as ordinary assets.

Note: Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient
for a taxpayer to be considered as habitually engaged in the sale of real estate.

If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or developer, he/it
may nevertheless be deemed to be engaged in the real estate business through the establishment of
substantial relevant evidence (such as consummation during the preceding year of at least six (6)
taxable real estate sale transactions, regardless of amount; registration as habitually engaged in real
estate business with the Local Government Unit or the Bureau of Internal Revenue, etc.)

b) In the case of taxpayer not engaged in the real estate business, real properties, whether land,
building, or other improvements, which are used or being used or have been previously used in trade
or business of the taxpayer shall be considered as ordinary assets.

c) In the case of taxpayers who changed its real estate business to a non-real estate business, real
properties held by these taxpayer shall remain to be treated as ordinary assets.

d) In the case of taxpayers who originally registered to be engaged in the real estate business but
failed to subsequently operate, all real properties acquired by them shall continue to be treated as
ordinary assets.
e) Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real
estate business, or formerly being used in the trade or business of a taxpayer engaged or not
engaged in the real estate business, which were later on abandoned and became idle, shall continue
to be treated as ordinary assets. Provided however, that properties classified as ordinary assets for
being used in business by a taxpayer engaged in business other than real estate business are
automatically converted into capital assets upon showing proof that the same have not been used in
business for more than two years prior to the consummation of the taxable transactions involving
said properties

f) Real properties classified as capital or ordinary asset in the hands of the seller/transferor may
change their character in the hands of the buyer/transferee. The classification of such property in the
hands of the buyer/transferee shall be determined in accordance with the following rules:

i) Real property transferred through succession or donation to the heir or donee who is not engaged
in the real estate business with respect to the real property inherited or donated, and who does not
subsequently use such property in trade or business, shall be considered as a capital asset in the
hands of the heir or donee.

ii) Real property received as dividend by the stockholders who are not engaged in the real estate
business and who do not subsequently use such property in trade or business, shall be considered as
a capital asset in the hands of the recipients even if the corporation which declared the real property
dividends is engaged in real estate business.

iii) The real property received in an exchange shall be treated as ordinary asset in the hands of the
case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is
engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business,
will use in business the property received in exchange.

g) In the case of involuntary transfers of real properties, including expropriations or foreclosure sale,
the involuntariness of such sale shall have no effect on the classification of such real property in the
hands of the involuntary seller, either as capital asset or ordinary asset as the case may be.

11) What is the basis in the valuation of property?

The value of the real property will be based on the selling price, fair market value as determined by
the Commissioner (zonal value) or the fair market value as shown in the schedule of values of the
Provincial or City Assessor, whichever is higher.

If there is no zonal value, the taxable base is whichever is higher of the gross selling price per sales
documents or the fair market value that appears in the latest tax declaration.

If there is an improvement, the FMV per latest tax declaration at the time of the sale or disposition,
duly certified by the City/Municipal Assessor shall be used. No adjustments shall be added on the
said value, provided that the tax declaration bears the upgraded fair market value of the said
property pursuant to Section 219 of R.A. No. 7160, otherwise known as the Local Government Code
of 1991 and the last paragraph of the Local Assessment Regulations No. 1-92 dated October 6, 1992.

In case the tax declaration being presented was issued three (3) or more years prior to the date of
sale or disposition of the real property, the seller/transferor shall be required to submit a certification
from the City/Municipal Assessor whether or not the same is still the latest tax declaration covering
the said real property. Otherwise, the taxpayer shall secure its latest tax declaration and shall submit
a copy thereof duly certified by the said Assessor. (RAMO 1-2001)

For shares of stocks, it will be based on the net capital gains realized from the sale, barter, exchange
or other disposition of shares of stocks in a domestic corporation, considered as capital assets not
traded through the local stock exchange.
12) What are the applicable tax rates of Capital Gains Tax under the National Internal Revenue Code
of 1997?

a) Real Properties - 6 %

b) For Shares of Stocks not Traded in the Stock Exchange, on the net Capital Gains

- Not over P100,000 - 5%

- Any amount in excess of P100,000 - 10%

13) Who are required to file the Final Capital Gains Tax return?

Every person, whether natural or juridical, resident or non-resident, including estates and trusts,
who sells, transfers, exchanges or disposes real properties located in the Philippines classified as
capital assets, including pacto de retro sales and other forms of conditional sales or shares of stocks
in domestic corporations not traded through the local stock exchange classified as capital assets.

14) What is the procedure in the filing of Final Capital Gains Tax return?

File the Final Capital Gains Tax return in triplicate (two copies for the BIR and one copy for the
taxpayer) with the Authorized Agent Bank (AAB) in the Revenue District where the seller or
transferor is registered, for shares of stocks or where the property is located, for real property. In
places where there are no AAB, the return will be filed directly with the Revenue Collection Officer or
Authorized City or Municipal Treasurer.

15) Who/what are considered exempt from the payment of Final Capital Gains Tax?

• Dealer in securities, regularly engaged in the buying and selling of securities

• An entity exempt from the payment of income tax under existing investment incentives and
other special laws
• An individual or non-individual exchanging real property solely for shares of stocks resulting
in corporate control
• A government entity or government-owned or controlled corporation selling real property
• If the disposition of the real property is gratuitous in nature
• Where the disposition is pursuant to the CARP law

16) Who are conditionally exempt from the payment of Final Capital Gains Tax?

Natural persons who dispose their principal residence, provided that the following criteria are met:

• The proceeds of the sale of the principal residence have been fully utilized in acquiring or
constructing new principal residence within eighteen (18) calendar months from the date of
sale or disposition;
• The historical cost or adjusted basis of the real property sold or disposed will be carried over
to the new principal residence built or acquired;
• The Commissioner has been duly notified, through a prescribed return, within thirty (30) days
from the date of sale or disposition of the person’s intention to avail of the tax exemption;
• Exemption was availed only once every ten (10) years; and
 • There is no full utilization of the proceeds of sale or disposition. The portion of the gain presumed
to have been realized from the sale or disposition will be subject to Capital Gains Tax.
• In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and
shall deduct from the agreed selling price/consideration the 6% capital gains tax which shall be
deposited in cash or manager’s check in interest-bearing account with an Authorized Agent Bank (AAB)
under an Escrow Agreement between the concerned Revenue District Officer, the Seller and the
Transferee, and the AAB to the effect that the amount so deposited, including its interest yield, shall
only be released to such Transferor upon certification by the said RDO that the proceeds of the
sale/disposition thereof has, in fact, been utilized in the acquisition or construction of the
Seller/Transferor’s new principal residence within eighteen (18) calendar months from date of the said
sale or disposition. The date of sale or disposition of a property refers to the date of notarization of the
document evidencing the transfer of said property. In general, the term “Escrow” means a scroll, writing
or deed, delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the
latter until the happening of a contingency or performance of a condition, and then by him delivered to
the grantee, promise or obligee.

17) What is a Certificate Authorizing Registration?

Certificate Authorizing Registration (CAR) is a certification issued by the Commissioner or his duly
authorized representative attesting that the transfer and conveyance of land,
buildings/improvements or shares of stock arising from sale, barter or exchange have been reported
and the taxes due inclusive of the documentary stamp tax, have been fully paid.

CARs shall now have a validity of one (1) year from date of issue. In case of failure to present the
same to the Registry of Deeds (RD) within the one (1) year period, the same shall be presented for
revalidation to the District Office where the CAR was issued. The revalidation, evidenced by stamping
the phrase "revalidated on __________ to expire on ___________" in a conspicuous space in the
CAR, shall be good for another one-year period, after which the CAR losses its validity. (RMO 15-
2003)