Moving the Immovable: Basis of CGT and DST of Previously Mortgaged Real Property

Moving the Immovable

by Andrea Mae D Gatchalian


When starting a family, one of the concerns is saving enough money to be able to afford a lot to build a home. It is the dream of many Filipinos to own a house and lot where their family can grow and build memories. Indeed, having a place to call home is a dream but it comes with a hefty price. In reality, not all are privileged to afford to buy a house on full cash payment basis, hence, many turn to housing loans for financial assistance. Further, due to unfortunate circumstances, some have to sell their property before the acquired loan is fully paid.

moving the immovable

A house and lot is a perfect example of a real property (also called immovable property). Article 415 of the Civil Code of the Philippines enumerates other kinds of immovable property. The list is exclusive and those that are not mentioned are classified as personal property (also called movable property). In purchasing a real property, before a Transfer of Certificate of Title (TCT) is issued to the buyer, there are several taxes that have to be settled depending on the situation; some of them are Capital Gains Tax (CGT) and Documentary Stamp Tax (DST). Here, we shall discuss the tax implications of CGT and DST in relation to a sale of a mortgaged real property.

The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 19-2018 dated March 19, 2018 clarifying the basis for the computation of CGT and DST with regard to the sale of previously mortgaged real property.

In the sale of real property, there may be instances wherein its mortgaged value is higher than its fair market value or gross selling price. The BIR saw the need to issue the RMC as it observed that some Revenue District Offices (RDOs) assess the CGT and DST based on the value other than what is stated in the law. In particular, some RDOs assess the CGT and DST based on the mortgaged value of the property previously appraised. Hence, the BIR issued the RMC to clarify the correct basis for computation.

The National Internal Revenue Code of 1997, as amended (hereafter referred as Tax Code), provides several provisions on CGT and DST on the sale of real property and its basis for assessment purposes.

Section 24 (D)(1) of the Tax Code provides that a “final tax of six percent (6%) is due on the sale of real property based on the gross selling price or current fair market value as determined in accordance of Section 6(E) of the Tax Code, whichever is higher.”

The Tax Code has a similar rule in assessing DST. Section 196 of the Tax Code provides that the tax due shall be based on the “consideration contracted to be paid for such realty or on its fair market value determined in accordance of Section 6(E) of the Tax Code, whichever is higher.”

Section 6(E) of the Tax Code gives the Commissioner the authority to determine the fair market value of the property which is either the zonal value as determined by him or the fair market value as shown in the schedule of values of the Provincial and City Assessors.

Absolute Sentencia Expositore Non Indiget or a sentence that is plain or absolute does not need an expositor. In statutory construction, where the language of the law is clear, the law should be applied directly and no other interpretation shall be allowed.

The provisions abovementioned are crystal clear on what forms the basis of the CGT and DST. The only basis for the computation are either the gross selling price or the fair market value, whichever is higher. Nowhere in the law is it provided that the previously mortgaged value of the property can be used as a basis in determining the CGT and DST on the sale of mortgaged real property.

In applying the law, even if the mortgaged value is higher than the fair market value, the latter should be used by the RDOs as it is the basis set by law. However, if the gross selling price is higher than the fair market value, the former should be used as basis for computation.

But what is the significance of having a correct basis in assessing the real property for CGT and/or DST? The incorrect payment of the necessary tax due may result to either underpayment or overpayment. The Tax Code imposes penalties for underpayment of the tax due. The taxpayer may be held liable to pay twenty-five percent (25%) surcharge or fifty percent (50%) surcharge, if found to be fraudulent, and a deficiency or delinquency interest which have been amended by Tax Reform for Acceleration and Inclusion Law effective this year at a rate of twelve percent (12%) per annum. Lastly, the title of the property cannot be transferred to the taxpayer since a Certificate Authorizing Registration is needed which can only be issued upon proper payment of the taxes due.

On the other hand, if the taxpayer pays more than what he is required to pay, it results to overpayment that warrants the taxpayer to file a claim for refund. The Tax Code provides that a written claim for refund must be filed within two years from the payment of the tax in the RDO where the payment was made. Further, the administrative and judicial claim must be both filed within the two-year prescriptive period.

In buying a real property, the buyer should not only save the purchase money but incidental expenses as well. With this RMC, the taxpayers are guided that the only basis for the computation of CGT and DST are those set by the law. The knowledge gained from the RMC will help ease the minds of the taxpayers that they have paid the correct tax due and will be able to enjoy their property without problems.



Andrea Mae D. Gatchalian is a Supervisor from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email or

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