DEDUCTIONS from Gross Estate

A. Ordinary Deductions
1. claims against the estate, Unpaid mortgages, Claims against insolvent, Unpaid tax and Losses
 Claims against the estate – this represents personal obligation of the deceased existing at the time of
his death except unpaid funeral expense and unpaid medical expenses. The claims may arise out of
contract, tort or operation of law. The requisites for deductibility are the following:
a. must have been contracted in goods faith and for an adequate and full consideration in money or
money’s worth.
b. the debt instrument must be duly notarized except loans granted by financial institutions where
notarization is not part of the business practice/policy of the financial institution/lender.
c. it must not be condoned by the creditor; and
d. the action to collect from the decedent must not have been prescribed.

 Unpaid mortgages – upon the property left by the decedent. The requisites for deductibility are the
following:
a. the mortgage indebtedness was contracted in good faith and for an adequate full consideration in
money or money’s wort; and
b. the fair market value of the property mortgage without deducting the mortgage indebtedness have
been included in the gross estate.

 Claims against insolvent persons (bad debts) – receivable of the decedent which are uncollectible due
to insolvency of the debtor. Its requisites for deductibility are as follows:
a. the value of the decedent’s interest therein must be included in the gross estate
b. the debtor’s insolvency/incapacity is proven and not merely alleged

 Unpaid income and property taxes – which have accrued as of the death of the decedent which were
unpaid as of the time of death

 Losses – requisites
a. the loss must arise during the settlement of the estate but beyond the deadline for the payment of the
estate tax.
b. it must arise from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement.
c. such losses have not been claimed as deductions for income tax purposes.
d. must not be compensated by insurance

2. Transfer for Public Purpose – the amount of all bequest, legacies devisees or transfers to or for the use of
the Government of the Philippines, or any of its political subdivision thereof, for exclusively public purposes.
3. Vanishing deduction
The vanishing deduction which is otherwise known as “property previously taxed” is an allowed deduction from
the gross estate situated in the Philippines of a person who died within five (5) years from the acquisition of
property by gift or inheritance.

The purpose of vanishing deduction is to ease the harshness of successive taxation on the same property
within a relatively short period of time.

To be allowed as deduction, the following conditions must be satisfied:

 The property must be situated in the Philippines;
 That the donor’s tax or estate tax imposed on the first transfer was finally determined and paid;
  The property can be identified as the one received from such prior decedent by gift, devise or
inheritance, or from the donor by gift, or which can be identified as having been acquired in exchange
for property so received; and
 The property must have formed part of the gross estate of the prior decedent or have been included in
the total amount of the gifts of the donor made within five (5) years prior to the death of the present
decedent.

The following are the steps involved in computing the vanishing deduction:

 Identify the property subject to vanishing deduction and give the proper value (at the time previously
taxed and or the present value, whichever is lower)
 Deduct mortgage or lien paid by the present decedent on the property, if any. The result is the initial
basis.
 From the initial basis, deduct the proportionate share of the initial basis over the gross estate multiplied
by all the deductions, except family home, standard deduction, amount received under RA 4917, and
the net share of the surviving spouse in the conjugal or community property. The result is the actual
basis.

The amount deductible from the initial basis shall be computed by applying the following formula:

Initial Basis
Gross estate X deductions

 Multiply the actual basis by the appropriate rate, based on the length of time the property has been
acquired by the present decedent, as follows:

More than Not more than Rate

XX 1 year 100%
1 year 2 years 80%
2 years 3 years 60%
3 years 4 years 40%
4 years 5 years 20%

B. SPECIAL DEDUCTIONS

1. Amounts received by heirs from employers under RA 4917 – amounts received by heirs from the
decedent’s employer as consequence of the death of the decedent-employee. Provided, that such amounts is
included in the gross estate of the decedent.

2. Family home
The family home pertains to the dwelling house where the spouses and their family reside, and the land on
which it is situated (Art. 152, Family Code). It is the place to which whenever absent for business or pleasure one
still intends to return.

Actual occupancy of the house or house and lot as the family residence shall not be considered interrupted or
abandoned in such cases as the temporary absence from the constituted family home due to travel or studies
or work abroad, etc.

The family home may also be constituted by an unmarried head of a family on his or her own property

It does not include the movables found therein because it is limited only to the house and lot on which the
house is situated.
For the purpose of gross estate of the decedent, the basis shall be the current fair market value or zonal value
of the family home, whichever is higher

The following are the conditions for allowance of family home as deduction

 The total value of the family home must be included as part of the gross estate
 It must be the actual residential home of the decedent and his family at the time of death, as certified by
the Barangay Captain of the locality where the family home is situated
 The amount deductible is the actual value as declared or included in the gross estate, but not
exceeding P10,000,000
For the purpose of availing of a family home deduction to the extent allowable, a person may constitute only
one family home.

3. Standard Deduction
This is a fixed amount equivalent to Five Million Pesos (P5,000,000) which is automatically deductible and not
subject to any substantiation.

This is a separate and distinct item of deduction which is independent from other items

The entire amount of P5,000,000 is deductible from the net estate

Like family home and amounts received by the heirs under Republic Act 4917, the standard deduction is not a
multiplier deduction for purposes of allocating the expenses in the computation of vanishing deductions.

Share of the Surviving Spouse in the Conjugal/Community Property

The share of the surviving spouse in the conjugal or community property as diminished by the obligations
properly chargeable to such property shall be deducted from the gross estate

Illustration:
The assessor’s value of the family home at the time of death of Fat Tai is P10,200,000 while the zonal value is
P11,350,000.

What value of family home is to be included in and deducted from gross estate?

The amount includible in the gross estate is the zonal value of P11,350,000 because it is higher than the
current value.
Tha family home deductible from the gross estate is P10,000,000 only because it is the maximum amount
allowed under the code.
If the family home is a conjugal or community property, the amount deductible is P5,675,000, the share of the
decedent in such property.

Illustration:
The following data pertains to a married decedent:

Conjugal property 5,000,000

Exclusive property 2,200,000
Charges against conjugal property 850,000
Charges against exclusive property 600,000

How much is the deductible share of the surviving spouse?

The amount deductible is P2,075,000 computed as follows:
Conjugal property 5,000,000
Less: conjugal deductions 850,000
Net conjugal 4,150,000
Multiply by the share of decedent 1/2
Deductible share of surviving spouse 2,075,000

Illustration:
Gina Dan, died on October 21, 2019 leaving a parcel of land which she inherited from her mother, Pina G. Dan
who died May 30, 2016. The value of the property at the time of death of her mother was P3,500,000, but it
has appreciated to P4,750,000 in 2019.

The gross estate, deductions and other data consisted of the following:

Community property 9,500,000

Exclusive properties of the decedent 6,500,000
Bequest to the government for public purpose 100,000
Claims against the estate 150,000

At the time of death of Pina, the land had an unpaid mortgage of P500,000 of which P200,000 was paid by
Gina.

Required: compute for the vanishing deduction

Value in estate of prior decedent 3,500,000

Value in estate of present decedent 4,750,000
Lower value 3,500,000
Less: mortgage paid 200,000
Initial basis 3,300,000
Less: Deductions (pro-rated)
Transfer for public purpose 100,000
Claims against the estate 150,000
Unpaid mortgage (500K-200K) 300,000
Total 550,000
Deductible (3,300,000 / 16,000,000 X 550,000) 113,437.50
Base 3,186,562.50
Rate (more than 3 years, but not more than 4 years) 40%
Vanishing deductions 1,274,625.00
Activity:
Lucy died leaving the following:

Exclusive properties 4,000,000

Conjugal properties 2,500,000
Judicial expenses 45,000
Funeral expenses 150,000
Notes payable (only ½ is notarized) 100,000
Claims against insolvent persons (50 is collectible) 120,000
Proceeds of life insurance (beneficiary is wife – revocable) 200,000
Death benefits under RA 4917 180,000
Medical expenses (1/2 is not supported by receipts) 550,000

The net taxable estate tax is?

a. 1,892,500
b. 265,000
c. 1,520,000
d. 1,862,500

Activity:
Fermin, Filipino, married, died January 1, 2019 leaving the following properties:

Inherited from his brother who died May 3, 2017

Riceland 1,000,000
Residential land 2,000,000
Inherited from his mother who died April 12, 2015 or five days after his marriage:
Coconut land 420,000
Acquired thru Fermin’s wife’s labor:
Family home 2,000,000
Car 500,000
Commercial land 1,000,000
Gold necklace (acquired by Fermin during a previous marriage
which had a legitimate descendant) 80,000

The Riceland and the residential land were previously mortgage for P350,000 when inherited where P200,000
was paid by Fermin during his lifetime.

The coconut land was mortgaged for P94,000 of which P14,000 was paid before his death. Also, Fermin, by
will bequeathed to Cauayan City the sum P200,000 for exclusively public purpose.

The estate incurred the following expenses:

Funeral expenses 140,000
Judicial expenses 80,000
Portion of family home destroyed by fire on January 1, 2019 100,000
Medical expenses 40,000

1. The gross estate of Fermin is?

a. 3,500,000
b. 7,000,000
c. 5,250,000
d. 3,957,020
2. the vanishing deduction is
a. 2,032,000
b. 39,440
c. 2,220,504
d. 2,070,400

3. the net taxable estate is

a. 2,109,840
b. none
c. 515,000
d. 535,000