Republic of the Philippines

President Ramon Magsaysay State University

College of Accountancy and Business Administration
(Formerly Ramon Magsaysay Technological University)
Iba, Zambales, Philippines
Tel/Fax No.: (047) 811-1683

Instructional Material
For
Transfer
&
Business
Taxation

Prepared by:
SHARMAINE L. VILLALOBOS-SANTIAGO, CPA
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CHAPTER 1
SUCCESSION AND TRANSFER TAXES

Article 712 (Civil Code)

“Ownership is acquired by occupation and by intellectual creation. Ownership and other real tights over
property are acquired and transmitted by law, by donation, by testate and intestate succession, and in
consequence of certain contracts, by tradition. They may also be acquired by means of prescription.

Transfer taxes are taxes imposed upon the gratuitous disposition of private properties or rights. Gratuitous
transfer is one that neither imposes burden nor requires consideration from transferee or recipient.

TYPES OF TRANSFER TAXES

1. Estate Tax
2. Donor’s Tax

Gratuitous transfer or donation my take effect at the time of death of the donor or during the lifetime of
both donor and donee.

DONATION MORTIS CAUSA ESTATE TAX

DONATION INTER VIVOS DONOR’s TAX

CLASSIFICATION OF MODES

Modes of acquiring ownership are generally classified into two (2) classes: the original and derivative
modes.

ORIGINAL – ownership has been created for the first time (Occupation, Prescription, Law or Intellectual
Creation)

DERIVATIVE – ownership where the property is transferred from one person to another. (Succession,
Tradition)

SUCCESSION

Succession is a mode if acquisition by virtue of which, the property, rights and obligation to the extent of
the value of the inheritance, of a person are transmitted through his death to another or others either by his
will or by operation of law. (Art. 774 Civil Code)

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The inheritance includes all property, rights and obligation of a person which are not extinguished by his
death (Art. 776 Civil Code)

The Death of a person can be either ACTUAL OR PRESUMED. The following scenarios in where a
person can be presumed as dead for the purposes of succession:

1. Person is absence for ten (10) years, it being unknown whether or not they still live.
2. Person at the age of seventy-five (75) years, is absence for five (5) years.
3. A person on board a vessel lost during a sea voyage, or an airplane which is missing, who has not
been heard of for four (4) years since the loss of the vessel or airplane.
4. A person in the armed forces who has taken part in war, and has been missing for (4) years;
5. A person who has been in danger of death under other circumstances and his existence has not
been known for (4) years.

KINDS OF SUCCESSION

1. Testamentary or Testate – a type of succession that results from the designation of an heir, made
in a will executed in the form prescribed by law.
2. Legal or Intestate – succession occurred when the person died without a will or left an invalid will.
In this case, the properties will be distributed according to the rule of law.
3. Mixed – succession is affected partly by “will” and partly by operation of law. It occurs when:
a. The testator left a valid will but failed to include all properties;
b. No indication in the will regarding the disposition of the properties; or
c. If any of the heirs is incapable to accept or enter into succession.

INFORMATION:

TESTATOR – refers to a person who has died and has left a will.

TESTATE - describes a person's estate where the decedent passed away with a last will and testament

INTESTATE – dying without a legal will.

DECEDENT – a person who died and whose properties are transmitted through succession.

ELEMENTS OF SUCCESSION

1. Decedent
2. Inheritance
3. Successor

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Successors are classified under the laws as follows:

a. Compulsory Heirs - They succeed whether the testator likes it or not. They cannot be deprived
by the testator of their legitimate except by disinheritance properly effected.

Kinds of Compulsory Heirs

 Primary – those who have precedence over and exclude other compulsory heirs.
 Secondary – those who succeed only in the absence of primary compulsory heirs
 Concurring – those who succeed together with the primary or secondary
compulsory heirs

PRIMARY SECONDARY CONCURRING

Legitimate Legitimate Parents Illegitimate

Children and and ascendants Children and
descendants descendants and
surviving spouse

b. Voluntary Heirs – those instituted by the testator in his will to succeed to the inheritance of the
portion thereof of which the testator can freely dispose. Free portion refers to the portion or value
left in the estate after deducting the legitimate of the compulsory heirs.
c. Legal or Intestate Heirs – those who succeed to the estate of the decedent by operation of law
(decedent died without a valid will or his estate was not entirely disposed of by will)

ORDER OF INTESTATE SUCCESSION

1. Legitimate children or descendants

2. Legitimate parents or ascendants
3. Illegitimate children or descendants
4. Surviving Spouse
5. Brothers and Sisters, Nephews and Nieces
6. Other collateral relatives within the 5th degree
7. State or the government

CHAPTER 2
ESTATE TAXATION

TRANSFER TAX

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Taxes imposed when the title to a property is shifted from one party to another through a
GRATUITOUS TRANSFER.

- Under the NIRC, there are two kinds of transfer taxes, namely the estate tax and the donor’s tax.

ESTATE TAX

 It is da tax levied on the right to transmit properties from a decedent to his heirs through
succession. In other words, it is a tax on the privilege to transfer property at death.
 It is laid neither on the property nor on the transferor or the transferee. It is an excise or
privileged tax, and its object is to tax the shifting economic benefits and enjoyment of property
from the dead to the living.
 It is a transfer tax not a property tax. An estate tax is a tax on the right to transfer and not right to
inherit property.
 Estate tax accrues as of THE DATE OF THE DECEDENT’S DEATH. Upon the death of the
decent, succession takes place, and the right of the State to tax the privileged to transmit the
estate vest instantly upon death.
 Estate tax are paid within one year of the death date.
 The estate shall be the one liable to pay the tax but the administrator/executor, or heirs, shall be
the one personally obliged to pay the taxes on or before the due date.
 Estate tax is governed by the law in force at the time of death of the decedent.

The tax rate is as follows:

a. If the decedent died BEFORE January 1, 2018

OVER TAX PLUS Of the Excess Over

0 – 200,000 Exempt

200,000 – 500,000 0 5% P 200,000

500,000-2,000,000 15,000 8% 500,000

2,000,000-5,000,000 135,000 11% 2,000,000

5,000,000-10,000,000 465,000 15% 5,000,000

10,000,000 above 1,215,000 20% 10,000,000

b. If the decedent died ON OR AFTER January 1, 2018

ESTATE TAX IS 6%

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FORMULA FOR ESTATE TAX (Single Decedent)

Gross Estate P XXX

Less: Ordinary Deductions (Xxx)
Estate after Ordinary Deductions XXX
Less: Special Deductions (Xxx)
Net Taxable Estate XXX
Estate Tax Rate 6%
Estate Tax Due XXX
Less: Estate Tax Credit (Xxx)
Estate Tax Payable XXX

FORMULA FOR EXTATE TAX (Married Decedent)

EXCLUSIVE CONJUGAL TOTAL

Gross Estate P XXX P XXX P XXX
Less: Ordinary Deductions (XXX) (XXX) (XXX)
Estate after Ordinary Deductions P XXX P XXX P XXX
Less: Special Deductions (XXX)
NET ESTATE P XXX
LESS: Share of Surviving Spouse (XXX)
(Conjugal estate /2)
Net Taxable Estate P XXX
Estate Tax Rate 6%
Estate Tax Due P XXX
Less: Estate Tax Credit (XXX)
ESTATE TAX PAYABLE P XXX

The gross estate is comprised of properties and interest of the decedent at the time of their death,
including revocable transfers and transfers for insufficient consideration and rights not
extinguished by death.

COMPOSITION

1. Resident and Non-Resident Citizen – all properties located within or outside the Philippines
shall be included in the gross estate. It includes:

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a. Real Property, wherever situated

b. Tangible Personal Property, wherever situated
c. Intangible Personal Property, wherever situated

2. Non-Resident Alien decedent – only the following properties located within the Philippines
shall be included in the estate:
a. Real Property situated in the Philippines
b. Tangible Personal Property situated in the Philippines
c. Intangible personal property with a situs in the Philippines, unless exempt based on
reciprocity. There is reciprocity when:
i. The foreign country of the non-resident alien does not impose estate tax
ii. The foreign country of the non-resident alien allows the same exemption for
intangible properties for non-residents.

Intangible Properties include the following:

- Cash - Bank Deposits
- Receivables - Share of Stocks
- Patents and Copyrights - Franchise
- Bonds - Business Interest
- Other rights not extinguished by death

Determining the Situs of Properties

PROPERTY SITUS
Real Property Location of Property
Tangible Personal Property Location of Property
Receivables Residence of the Debtor
Bank Deposit Location of the Depository Bank

PROPERTY SITUS
Franchise If exercised in the Philippines
Shares of Stock, obligations, or bonds a. Issued by corporations organized or
constituted in the Philippines
b. Issued by a foreign corporation with 85%
of its business is located in the
Philippines; or
c. Issued by a foreign corporation if such
shares, obligations, or bonds have
acquired a business situs in the
Philippines.

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Shares or rights in any partnership, business or If established in the Philippines

industry

VALUATION OF GROSS ESTATE

The gross estate’s properties are valued at their fair market value at the time of the decedent’s death.

a. Personal Properties FMV at the time of death

b. Real Properties
c. Units of Participation in any association,
recreation, or amusement club
d. Value of the right to usufruct, use or
habitation, and annuity
e. Receivables
f. Non-interest-bearing note
g. Stocks
Whichever is higher of –
1. FMV as determined by the CIR or
2. FMV as determined by the provincial and
city assessor.
Bid Price nearest the date of death published in
any newspaper or publication of general
circulation
In accordance with latest Basic Standard
Mortality Table (BSMT), considering the
probable life of the beneficiary.
Face Value plus Interest
Discounted Value
1. Listed (common & preferred) – Mean
between the highest and lowest quotation
at the date of death or nearest to death
VALUE = (lowest + highest)/2
2. Unlisted
a. Common – book value on/date nearest
to the valuation date
b. Preferred – Par Value

EXEMPTIONS AND EXCLUSIONS FROM GROSS ESTATE

The following items are not included in the gross estate:

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1. Exclusive property of the surviving spouse

2. Property outside the Philippines of a non-resident alien decedent
3. Intangible personal properties in the Philippines of a non-resident alien under reciprocity
4. Merger of usufruct in the owner of the naked title.
5. Transmission from the first heir, legatee or done in favor of another beneficiary, following the
desire of the predecessor
6. All bequest, devices, legacies or transfer to social welfare, cultural and charitable institutions, no
part of the net income which insures to the benefit of any individual, provide that no more than
30% shall be used for administration purposes.

Properties excluded from gross estate under special law

1. Proceeds of group insurance

2. Proceeds from GSIS and SSS
3. War damage payments
4. United States Veterans Administration (USVA) benefits
5. Properties held in trust by the decedent
6. Personal Equity and Retirement Account (PERA) assets of the decedent-contributor
7. Compensation paid to private and public health workers who have did due to covid-19
8. Other properties exempt by law.

-There are properties not physically included in the estate at the time of death and have already been
transferred during the lifetime of the decedent to another person but still are included in the gross estate,
thus subject to estate tax.

TRANSFER IN CONTEMPLATION OF DEATH

If the decedent transferred their property before they died and the transfer is motivated by the thought of
death, although death is not imminent, it is included in the gross estate

The following are NOT motive by death:

1. To relieve the donor from the burden of management
2. To save income or property taxes
3. To settle family litigated and un-litigated disputes
4. To provide independent income from dependents
5. To reward services rendered.
REVOCABLE TRANSFER

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Refers to a transfer of property with retention or reservation of rights over the property by the donor
while he still lives. The enjoyment of the property may be altered, amended, revoked or terminated by
the decedent.

PROPERTY PASSING UNDER GENERAL POWER OF APPOINTMENT

The power of appointment refers to the right of decedent to choose who will succeed the property after
the 1st heir

This involves three parties, the decedent, the 1st heir, and the 2nd heir. The power of appointment is
exercised when the decedent places a restriction to whom the 1st heir can choose as the 2nd heir.

Basically, the decedent transferred the property to an heir with limitation that the heir can only tranfer it
to a specific person after the heir died. The power may be general or special.

a. GENERAL – the 1st heir can transfer it in favor of anybody, including himself, his estate, his
creditor, or the creditor of his estate. (Included in the gross estate)
b. SPECIAL – The 1st heir can only distribute the inherited property to a specified/limited group or
class of 2nd heirs. (Excluded from Gross Estate)

TRANFER FOR INSUFFICIENT CONSIDERATION

If a property is transferred in exchange for a consideration that is less than the prevailing market value at
the time of the transfer, it is included in the gross estate in an amount equal to the difference between the
FMV at the time of death less the value of the consideration.

SITUATION GROSS ESTATE

Consideration = or > FMV @ time of sale EXCLUDED (bona fide sale)
Consideration < FMV @ time of sale Included
Transfer made in the ordinary course of trade or EXCLUDED (bona fide sale)
business
No consideration received Subject to donor’s or Estate Tax

NOTE: The transfer for insufficient consideration should be in contemplation of death, or it is revocable.
Otherwise, it will be subject to donor’s tax, capital gains tax, or other tax as the case may be.

Illustration:

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Before the death of Lani, she had foreseen that she would die in a few days. To efficiently manage the
disposition for her estate, she transferred the following properties:

Property FMV @ time of FMV @ time of death Considered received

transfer
Car P 350,000 P 430,000 P 190,000
Land 820,000 760,000 600,000
Furniture 130,000 90,000 130,000

How much should be included in the gross estate?

Answer: P240,000 + P 160,000 =P 400,000

PROCEEDS OF LIFE INSURANCE

Generally, it is included in the gross estate. It is not included in the gross estate if the following requisite
are met:

a. It is an insurance on life of the decedent

b. It is irrevocable
c. The beneficiary must be a third person
A third person is the one who is not the estate itself, the administrator or executor.

Beneficiary Revocable Irrevocable

Decedent’s estate, TAXABLE TAXABLE
administrator, or executor
Other beneficiaries TAXABLE EXCLUDED

Proceeds/benefits received from SSS or GSIS and group insurance are excluded.
When the beneficiary is not stated or is not clear, it is deemed revocable.
If the insured didn’t change the beneficiary during his lifetime, the designation shall be deemed
irrevocable.

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CLAIMS AGAINST AN INSOLVENT PERSON

An insolvent person is a debtor who generally cannot pay their liabilities as they fall due in the ordinary
course of business or have liabilities greater than their assets. Such insolvency must be proven; a judicial
declaration of such is not required. It is included as part of the gross estate but is also reflected as an
ordinary deduction.

The amount of deduction shall be in proportion to the ratio of assets and liabilities of the debtor.

ILLUSTRATION:

At the time of Ginny’s death, she has a receivable from Pandey for P 40,000, but Pandey is insolvent
and only has assets of P320,000 to pay her liabilities worth P 500,000. How much should be included in
the gross estate? How much can the estate of Ms. Ginny claim as an ordinary deduction?

ANSWER: Amount included = P 40,000

Ordinary deduction = P 14,400

SOLUTION: P 40,000 x ((500,000-320,000)/ 500,000)

PROPERTY REGIME

The Family Code allows the future spouses to agree on a property regime that will govern them during
their marriage by stipulation in their marriage contract. It is governed by the provisions of the Family
Code and not by the Tax Code. The future spouses may have the following property regimes:
1. Absolute Community of Property (ACP);

When a couple enters into a regime of absolute community, the husband and wife become joint
owners of all the properties during the marriage. Whatever property each spouse brings into the
marriage, and those acquired during the marriage, form the common mass of the couple's
property.

The regime of absolute community of property shall apply:

a. If the future spouses stipulate upon it in their marriage settlement;
b. If they married ON or AFTER August 3, 1988, without a marriage settlement; or
c. If the marriage settlement is void.

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Marriage settlement is a contract entered into by the future spouses to fix the terms and conditions
of their property relations with regard to their present and future property. It is also called the
antenuptial agreement or matrimonial contract.

2. Conjugal Partnership of Gains (CPG);

Under the conjugal partnership of gains regime, the husband-and wife will place in the common
fund the proceeds, products, fruits, and income from their separate properties and those acquired
through their efforts or by chance. Upon dissolution of the marriage, the net gains or benefits
obtained by the spouses shall be divided equally between them unless otherwise agreed in the
marriage settlements.

CPG does not produce a merger of the properties of each spouse. Each spouse continues to be the
owner of what they had before the marriage

3. Complete Separation of Property

In a complete separation or property, each spouse shall own, manage, and control their own
property without the need for the consent of the other. All earnings from the profession, business,
or industry and all fruits, natural, industrial, or civil, due, or received during the marriage from
their separate property shall belong to each souse separately.

Separation of property may refer to present or future property or both. It may be total or partial. In
case of partial, the property not agreed upon as separate shall pertain to the absolute community.

4. Any other regime

The spouses may stipulate in the marriage settlement their own property regime if it is not contrary
to law, morals, good customs, public order, and policy.

DETERMINING THE PROPERTY REGIME

The stipulation made by the spouses in their marriage settlement shall be used in determining their
property regime. The agreed property relations shall commence from the celebration of marriage. Any
express or implied stipulation for the community regime to begin at a different time (before or after the
celebration) is null and void.

In the absence of a marriage settlement (no stipulation), or when the regime agreed upon is void, the
following system shall govern:

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If the spouses married BEFORE August 3, 1988 - CPG

If the spouses married ON or AFTER August 3, 1988 – ACP

ACP CPG
COMMON PROPERTY
 All properties owned by the spouses at the time  All proceeds, products, fruits, and income
of the celebration of the marriage from conjugal separate properties during the
 Properties acquired during the marriage marriage
 Income earned from community property.  Properties acquired by onerous title during the
marriage using the common fund, whether the
acquisition be for the partnership or for only
one of the spouses
 Those obtained from the labor, industry,
work, or profession of either or both spouses
during the marriage;
 The share of either spouse in the hidden
treasure which the law awards to the finder or
owner of the property; and
 Those acquired by chance (i.e., gambling or
betting). However, losses shall be borne
exclusively by the loser.

EXCLUSIVE PROPERTY
 Properties acquire during the marriage by  Properties acquire during the marriage by
gratuitous title and the fruits and income, if gratuitous title.
any, unless expressly provided by the and  That which is brought to the marriage as
donor, testator, or grantor that they shall his or her own; and
form part of the community property  Properties purchased with exclusive
 Property for the personal and exclusive use money of the wife or the husband.
of either spouse. However, jewelry shall
form part of the community property;
 Property acquired before the marriage by a
spouse who has legitimate descendants by
a former marriage and its fruits and
income.

Note: Under Article 117 of EO 297, properties acquired using common fund, for only one of the spouse
is considered COMMON PROPERTY.

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Summary of Classification:

C=Community/Conjugal; E=Exclusive

Property ACP CPG

1. Properties acquired before marriage C E
2. Properties acquired during the marriage C C
3. Properties acquired through gratuitous title before C E
4. Properties acquired through gratuitous title during marriage E E
5. Properties acquired using exclusive property during the marriage E E
6. Property for the personal and exclusive use of either spouse acquired using common E C
property
7. Fruits/Income from common property C C
8. Fruits/Income from exclusive property E C
9. Income earned from labor, industry, work or profession before the marriage. C E
10. Income earned from labor, industry, work or profession after the marriage. C C
11. Jewelry acquired using exclusive property C E
12. Jewelry acquired using common property C C
13. Jewelry acquired by gratuitous title during marriage E E
14. Personal property for exclusive use (Problem is Silent) E E
15. Properties & income silent as to when and how it is acquired. C C
16. Property acquired before the marriage by either spouse who has legitimate E E
descendants by a former marriage.
17. Winnings from a game of chance during the marriage (legal and illegal game) C C
18. Debts & losses from a game of chance during the marriage (legal & illegal games) E E

NOTE:

Property acquired during the marriage is presumed to belong to the community unless proved that is an
exclusive property. Thus, if silent, assume it is a common/conjugal property.

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ORDINARY DEDUCTIONS

1. Claims Against Insolvent Persons receivable or claims by the decedent that are not collectible.
Only the uncollectible portion against insolvent persons is deductible. Mere refusal to pay is not
sufficient. The person must be unable to pay due to his insolvency.

Property Relations: It will be reflected as a common/exclusive property depending on the

receivable’s classification in the gross estate. If the receivable is a common property in the gross
estate, it is a common deduction; otherwise, it is an exclusive deduction.

2. Losses— properties that is included in the gross estate that were loss after the decedent's death can
be claimed as a deduction if the following requisites are met:

a. Property was included in the gross estate

b. The loss must arise from, fires, storms, shipwreck, or other casualties, or robbery, theft, or
embezzlement
c. Loss happened within 1 year after decedent's death
d. Not compensated by insurance or otherwise
e. Not claimed as a deduction for income tax
f. Occurred during the settlement of the estate

If the loss is covered by an insurance plan, the amount covered cannot be claimed as a deductible
loss.

Property Relations: It will be reflected as a common/exclusive property depending on the

classification of the property loss in the gross estate. If the property is a common property, it is a
common deduction; otherwise, it is an exclusive deduction.

Illustration:

4 months after the decedent died, one of his properties worth P300,000 was destroyed by a fire.
The insurance company paid P120,000 to cover the damages. How much shall be included in the
gross estate and the amount of ordinary deduction from losses?

Answer: P300,00;
(P300k - P120k = P180,000)

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3. Taxes — unpaid taxes that accrued BEFORE/PRIOR to the death of the decedent are deductible.
It does not include:
 Income tax on income received after the decedent's death;
 Property taxes accrued after his death; and
 Estate tax
4. Indebtedness/claims against the estate — Claims againyt the estate or indebtedness in respect of
property may arise out of:
 Contract;
 Tort; or
 Operation of Law.

Mortgages and unpaid obligations of a decedent can be deducted from the gross estate if the following
requisites are met:
a. The liability represents a personal obligation of the deceased existing at the time of death;
b. The liability was contracted in good faith, and for adequate and full consideration in money
or money's worth;
c. The debt or claim is valid and enforceable in court; and
d. The indebtedness must not have been condoned by the creditor, or the action to collect
from the decedent must not have been prescribed.

What if the creditor of the estate condoned or reduced the amount of debt or claim after the date
of death?

It will not have any effect. As held by the Supreme Court in the case of Dizon v. CTA67, the date-
of-death valuation rule should be followed. Post-death developments are not considered in
determining the amount to be deductible. The estate tax is levied at the instance of death; hence
the net value of the property transferred should be ascertained, as nearly as possible, as of that
time.

Illustration:
On the date of Ms. Y's death, she has a loan payable to Mr. Z in the amount of P400,000. When
Mr. Z got the news of Ms. Y's death, the former told the heirs that he would reduce the amount of
debt to P250,000. How much is the ordinary deduction from the debt?

Answer: P400,000

NOTE: Unpaid medical bills and funeral expenses of the decedent are not qualified for deduction
because it is merged with the P5million standard deduction.

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Property Relations: The family benefit rule shall be used in determining if the claim/ debt is a
common/exclusive liability. Hence, if the debt is for the benefit of the family, it is considered as
common property. The following are considered common:

a. All debts and obligations contracted during the marriage for the benefit of the community,
contracted by both spouses, or by one spouse with the consent of the other;
b. Debts/ obligations contracted by either spouse without the consent of the other to the extent
that the family have benefited;
c. All taxes, liens, charges, and expenses, including major or minor repairs, upon the
community property;
d. All taxes and expenses for mere preservation of the separate \ property of either spouse used
by the family;
e. Expenses to enable either spouse to commence or complete a professional or vocational
course or other activity for self-improvement;
f. Ante-nuptial debts of either spouse insofar as they have redounded to the benefit of the
family;
g. Expenses of litigation between the spouses unless the suit is found to be groundless.

Note: Losses incurred during the marriage from any game of chance, betting, sweepstakes, or
gambling, whether legal or illegal, shall be borne by the loser's exclusive property and shall not be
charged to the community. But winnings shall form part of the community property.

Carlos v. Abelardo
G.R. No. 146504, April 9, 2002
Facts Petitioner Carlos granted a loan to spouses Abelardo for the purchase
of a house and lot. The house and lot were purchased and it became
the conjugal dwelling of the spouses. However, only the wife
acknowledged the loan.
Issue Is the husband liable for the loan?
Ruling Yes. While the husband refused and did not sign the acknowledgment
executed and signed by his wife, undoubtedly, the loan redounded to
the benefit of the family because it was used to purchase the house and
lot which became the conjugal home of respondent and his family.
Hence, notwithstanding the alleged lack of consent of respondent,
under Family Code, he shall be solidarily liable for such loan to ether
with his wife.

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5. Transfer for public use – if the decedent’s will states that a portion of their property will be given
to the Philippine government, to be used exclusively for public purpose, it can be claimed as a
deduction against gross estate.

Requisites for deductibility

1. The disposition is made in a last will and testament (testamentary in character)

2. To take effect after death;
3. In favor of the government of the republic of the Philippines, or any political subdivision thereof;
4. To be used exclusively for public purposes; and
5. To value the property given is included in the gross estate.

It should be emphasized that transfer for public use does not include transfer to foreign governments
and GOCCs.

Property Relations: for transfer for public use, it is presumed to be deduction against the exclusive
property. For if the property transferred is a common property, it will need the express consent of the
surviving spouse for it to become a deduction against common property.

With surviving spouses’ consent = Common Deduction

6. Vanishing deductions (Property previously taxed)

Requisites for deduction

1. The date of death of the present decedent and the date of death of the prior decedent or date of
donation must not exceed five years
2. Property can be identified as received from prior decedent, or from a donor.
3. Property is located in the Philippines
4. Property was included/part of the gross estate prior decedent or the gross gift of the donor.
5. The estate tax of the prior decedent and the donor’s tax of the donor must be paid
6. Vanishing deduction was claimed by the prior decedent.

Period from receipt to decedent’s death Rate

1 year or less 100%
More than 1 year but not more than 2 years 80%
More than 2 years but not more than 3 years 60%
More than 3 years but not more than 4 years 40%
More than 4 years but not more than 5 years 20%

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FORMULA

Value to take P XXX

(Lower of value the property at the time of transfer to present decedent or (ii) value
of the property at the date of death)
Less: Mortgage Paid by the present decedent (xxx)
(Mortgage liability paid must pertain to the liability assumed by the present
decedent from prior decedent/donor)
INITIAL BASIS P XXX
Less: Proportional Deduction (xxx)
(Initial basis/Gross Estate x Ord. Deducts. *)
FINAL BASIS P XXX
X Rate (See Table Above) %
VANISHING DEDUCTION P XXX
*Ordinary deductions #1-#5

Property Relations:
For vanishing deductions, the classifications will be dependent upon the classification of the property it
pertains to. However, some may say that it is presumed to be a deduction against the exclusive property.

The rationale is that as a general rule, the property received through donation or succession is classified
as an exclusive property; hence the vanishing deduction should also be a deduction against exclusive
property. But if the problem expressly provides that the property succeeded/ donated to the decedent is a
common property, then it will be sounder if the vanishing the deduction will also be deducted against
common property rather than exclusive property.

Illustration:

On January 1, 2022, Mr. Brody died of a heart attack. His gross estate is P 5,000,000. Some properties in
the gross estate were inherited from his late father, who died on September 24, 2019. Data are as follows:

FMV on 9/24/2019 FMV on 1/1/2022

Car P 400,000 P 550,000
House & Lot 2,300,000 2,000,000

In addition, a mortgage of P250,000 was attached to the house & lot when Mr. Brody inherited it. Only
P200,000 was paid by Brody. The total claims against the estate, including the unpaid mortgage is P
800,000.

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How much is the vanishing deduction?

ANSWER: P 1,108,800

CAR HOUSE & LOT

Value to take 400,000 2,000,000
Less: Mortgage Paid 0 (200,000)
Initial Basis 400,000 1,800,000
Less: Proportional Deduction* (64,000) (288,000)
Final Basis 336,000 1,512,000
X Rate 60% 60%
VANISHING DEDUCTION 201,600 907,200

*Proportional deduction
Car = 800,000 x (400,000/5,000,000)
= 64,000

House & Lot = 800,000 x (1,800,000/5,000,000)

=288,000

Illustration:

Case A

Determine the correct vanishing deduction rate of the following:

1. Ana died in April 1, 2021. A vehicle included in her gross estate was previously received by her
as inheritance from her father on January 8, 2018.
2. Pedro died in April 1, 2021. A parcel of land which was included in his gross estate was previously
received by him as donation from his best friend on May 3, 2018.
3. Juan died in April 1, 2021. A parcel of land was donated to him by his siter as a wedding gift on
September 7, 2015.
4. Lorna died on June 1, 2021. Included in her estate is a vacation house which she purchased on
June 30, 2019.

Answer:

1. 40%
2. 60%
3. N/A (Five years ago)
4. N/A (acquired through onerous title, VD only gratuitous transfer)

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SPECIAL DEDUCTIONS

A. Standard Deduction
The law allows a standard deduction without qualification, condition nor requisites, whatsoever.
this amount shall be allowed as an additional deduction without need of substantiation. The full
amount shall be allowed as deduction for the benefit of the decedent. The allowable amount under
the TRAIN LAW were as follows:
 If the decedent is a citizen or resident – P 5,000,000
 If the decedent is a non-resident alien – P 500,000
This is the only special deduction allowed to a nonresident alien decedent. The other special
deductions (family home and RA 4917) can be claimed only by citizen and resident decedents.

B. Family Home

- The dwelling house, including the land on which it is situated, where the husband and wife, or a
head of the family, and members of their family reside, as certified to by the Barangay Captain of
the locality.
The amount of family home allowable as a deduction of P 10,000,000 or the fair market value at
the time of the decedent’s death, of the family home and land on which it stands. The family home
is deemed constituted on the house and lot as a family residence and is considered as such for as
long as any of its beneficiaries actually resides therein. (Article 152 & 153, family Code)
The family home must be part of the properties of the absolute community or of the conjugal
partnership, or of the property (family home) and the property relations prevailing on the properties
of the husband and wife. It may also be constituted by an unmarried head of the family on his or
her own property.
Unmarried or legally man or woman with one or both parents, or with one or more brothers or
sisters or with one or more brothers or sisters or with one or more legitimate, recognized natural
or legally adopted children living with and dependent upon him or her for their chief support,
where such brothers or sisters or children are not more than twenty-one (21) years of age,
unmarried and not gainfully employed or where such brothers or sisters, regardless of age are
incapable of self-support because of mental or physical defect, or any of the beneficiaries mention
in Article 154 of the Family Code who is living in the family home dependent upon th head of the
family for legal support.

Beneficiaries of a Family Home

1. The husband and wife, or the head of the family; and

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2. Their parents, ascendants, descendants, including legally adopted children brothers or sisters,
whether the relationship be legitimate or illegitimate, who are living in the family home and
who depend upon the head of the family for legal support.

REQUISITES FOR DEDUCTABILITY

1. The decedent was married or if single, was ahead of the family
2. The family home as well as the land on which it stands must be owned by the decedent.
Therefore, the fair market value of the family home should have been included in the
computation of the decedent’s gross estate.
3. The family home must be the actual residential home of the decedent and his family at the time
of his death, as certified by the barangay captain of the locality where the family home is
situated.
4. Allowable deduction must be in an amount equivalent to the current fair market value of the
family home as declared or included in the gross estate, or the extent of the decedent’s
interest(whether conjugal/community or exclusive property), whichever is lower but not
exceeding P10,000,000, as amended.

Illustration
Determine the allowable deduction for Family Home from the following independent cases:
A. FH valued at P15,000,000. Decedent was single.
B. FH valued at P15,000,000. Decedent was head of the family.
C. FH valued at P5,000,000. Decedent was head of the family.
D. FH valued at P15,000,000(exclusive). Decedent was married.
E. FH valued at P15,000,000 (conjugal). Decedent was married.
F. FH valued at P15,000,000 of which P10,000,000 is allocated to the land (exclusive) and
P5,000,000 to the house (conjugal). Decedent is married.
G. The fair market value of the family home which is partly exclusive and partly common as follows:

Family Lot (exclusive) P5,000,000

Family house (Conjugal) 9,000,000
Answer:

a. 0 d. 10M
b. 10M e. 7.5M
c. 5M f. 10M

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C. Amounts received by heirs under RA 4917

Any amount received by heir(s) from the decedent’s employer as a consequence of the death of
the decedent-employee in accordance with RA No. 4917 (An Act Providing that Retirement
Benefits of Employees of Private Forms shall not be subject to Attachment, Levy, Execution or
Any Tax Whatsoever), provided such amount is included as part of the gross estate of the decedent.

NET SHARE OF THE SURVIVING SPOUSE

The amount deductible under this category is the net share of the surviving spouse in the conjugal
partnership of property. The net share is equivalent to ½ or 50% of the conjugal property after
deducting the obligations chargeable (ordinary deductions only) to such property. The share of the
surviving spouse must be removed to ensure that only the decedent’s interest in the estate is taxed.

Deductions from the Gross Estate of a Non-Resident Alien

The value of the net estate of a decedent who is a non-resident alien in the Philippines shall be
determined by deducting from the value of that part of his gross estate which at the time of his
death is situated in the Philippines. The table below is based on RR2-2003; RR 12-2018.

DEDUCTION NRA DECEDENT

A. Ordinary Deductions
1. LITe (Losses, Indebtedness, Taxes,  (proportional deduction only)**
etc)
2. Vanishing Deduction  .
3. Transfer for Public Use 
B. Special Deductions
1. Standard Deduction  (P500,000)
2. Family Home  .
3. RA 4917 
C. Share of Surviving Spouse 
** Total LITe x (GE Phils/GE World)

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Illustration:

Mr. Kyung, a resident of Gangnam, South Korea and a Korean citizen died on July 4, 2020 leaving the
following properties:

Condominium in Makati 4500000

Family Home in Seoul, Korea 7000000
Rest House in Australia 2750000
Jewelries received as a gift dated 8/25/2019 500000
Car in Makati 1000000

The heirs of Mr. Kyung claimed the following deductions:

Funeral Expenses P 300,000

Claim against the estate 500,000
Claim against insolvent person 500,000
Judicial expenses 100,000
Medical Expenses 200,000
Family Home 1,500,000
Standard Deductions 1,200,000

DETERMINE THE NET TAXABLE ESTATE

SOLUTION:
GROSS ESTATE
Condo in Makati 4,500,000
Jewelries 500,000
Car in Makati 1,000,000
Claims Against Insolvent Person 500,000
TOTAL GE IN PHIL 6,500,000
ALLOWABLE DEDUCTIONS
OD
LITe (6.5M/16.25M x 1,000,000) (400,000)
Vanishing Deductions (469,231)
Special Deductions =Standard Deductions (500,000)
TAXABLE NET ESTATE 5,130,769

 Funeral and Judicial Expenses are no longer allowed under TRAIN LAW
 GE=include claim against insolvent person

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 LITe = Claim against the estate and claim against insolvent person. However, the allowable
amount shall only be proportional amount of GE Phils over GE world if the decedent is a non-
resident alien.
 P 500,000 is the allowable standard deduction of NRA under TRAIN LAW.

Computation of Vanishing Deductions

Value to take P500,000

Less: Mortgage Paid -
Initial Basis P 500,000
Less: Proportional Deduction (30,769)
(500/6500 x P400,000)
Final Basis 469,231
X Rate (within 1 year) 100%
VD 469,231

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