National Internal Revenue Code of 1997
⚠️ Legal Disclaimer
Educational purposes only. This content is provided for general information and educational purposes only. It does not constitute legal advice and should not be relied upon as such.
Tax information is based on NIRC 1997 and BIR Revenue Regulations current as of the last update date. Tax laws change frequently. Consult a tax professional or BIR directly.
Professional consultation required. For specific legal concerns, transactions, or disputes, please consult a licensed attorney, relevant government agency (BIR, DHSUD, PRC, Register of Deeds), or qualified tax professional.
Accuracy disclaimer. While we strive for accuracy, laws and regulations change frequently. Information may be outdated. Always verify with official sources (Official Gazette, BIR, DHSUD, Supreme Court).
Plain-Language Summary
The National Internal Revenue Code of 1997 (NIRC), also known as Republic Act No. 8424, is the cornerstone of Philippine taxation law, including comprehensive provisions for real estate transactions. Enacted on December 11, 1997, and effective January 1, 1998, it consolidates and modernizes all tax laws in the country, replacing the outdated Tax Code of 1977. For real estate professionals, buyers, sellers, and investors, NIRC 1997 is critical because it governs four major taxes on property transactions: Capital Gains Tax (CGT) - Section 24(D) imposes a 6% final tax on the gains from sale of real property (land, buildings, and other improvements) by individuals and domestic corporations not engaged in the real estate business. This is computed on the higher of: (1) the gross selling price, or (2) the current BIR zonal value (fair market value). For example, if you sell a residential lot for ₱5 million but the zonal value is ₱6 million, CGT is computed as ₱6 million × 6% = ₱360,000. The seller pays this tax, and it must be filed and paid within 30 days from the sale. BIR Form 1706 is used for individuals. Value Added Tax (VAT) - Section 106 requires corporations habitually engaged in selling real estate (developers, realty companies) to charge 12% VAT on sales, EXCEPT if: (1) the property is classified as capital asset (held for more than 5 years and not inventory), or (2) the seller qualifies as a VAT-exempt entity. Developers selling condominiums within 5 years of completion must charge buyers 12% VAT. For a ₱5 million unit, VAT is ₱600,000. The developer collects this from the buyer and remits it to BIR monthly via Form 2550M. VAT and CGT are mutually exclusive - you pay one or the other, never both. Documentary Stamp Tax (DST) - Section 196 requires buyers to pay DST on deeds of sale and conveyance documents. The rate is ₱15.00 for every ₱1,000 of the selling price or zonal value (whichever is higher). For a ₱6 million property, DST is (₱6,000,000 ÷ ₱1,000) × ₱15 = ₱90,000. This must be paid before the deed can be registered with the Register of Deeds. DST applies to ALL property sales, whether subject to CGT or VAT. Withholding Tax on Rentals - Section 57(A) requires tenants (lessees) to withhold 5% creditable withholding tax on monthly rental payments of ₱10,000 or more if the landlord is an individual, or 5% if a corporation. For a ₱50,000/month commercial lease, the tenant withholds ₱2,500 and remits it to BIR using Form 1601-E, paying the landlord only ₱47,500. The landlord can claim this as a tax credit when filing annual income tax returns. Filing Requirements and Deadlines - All real estate tax returns must be filed with the BIR Revenue District Office (RDO) where the property is located, NOT where the seller resides. For CGT, sellers must file BIR Form 1706 within 30 days of sale. Failure to file results in 25% surcharge plus 20% annual interest. For VAT, developers file monthly (Form 2550M by the 20th of the following month) and quarterly (Form 2550Q). DST must be paid before deed registration - the Register of Deeds will reject unstamped deeds. Recent Amendments - The Tax Reform for Acceleration and Inclusion (TRAIN) Law (RA 10963) amended NIRC in 2018, increasing DST rates by 50%. The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act (RA 11534) reduced corporate income tax in 2021 but kept real estate CGT and VAT rates unchanged. Presidential Decree 1808 (1981) exempted sales of principal residences worth ₱1.5 million or less from CGT, but this amount has not been updated since 1981 and is effectively obsolete. Interaction with Other Laws - NIRC works alongside the Local Government Code (RA 7160) which governs Real Property Tax (RPT). While NIRC covers national taxes (CGT, VAT, DST), LGC covers local taxes (RPT). Sellers must secure a Tax Clearance Certificate from the local Treasurer's Office proving RPT is paid before BIR will process CGT filings. Additionally, BIR coordinates with the Land Registration Authority (LRA) to track property transfers and ensure tax compliance. Penalties for Non-Compliance - Section 248 of NIRC imposes severe penalties: 25% surcharge on unpaid taxes, 20% annual interest, and potential criminal prosecution for tax evasion (₱100,000-₱500,000 fine plus 2-5 years imprisonment). Civil penalties can reach 50% of the tax due for fraudulent returns. The BIR has authority to file tax liens on properties and garnish bank accounts to collect unpaid taxes. Practical Tips for Compliance - Always use the higher of selling price or zonal value for computations. Obtain a Certificate Authorizing Registration (CAR) from BIR after paying CGT/VAT and DST - without this, the Register of Deeds cannot transfer the title. Keep all receipts for 10 years (BIR audit period). For inherited properties, estate tax must be paid before CGT applies on subsequent sale. For donated properties, donor's tax (6%) is paid by the donor, then CGT (6%) is paid by the donee if they later sell.
Key Provisions
Section 24(D) - Capital Gains Tax on Sale of Real Property
This section imposes a final tax of 6% on the presumed gains from sale of real property located in the Philippines, classified as capital assets. The tax applies to individuals and domestic corporations not habitually engaged in the real estate business. Computation is based on the higher of (1) gross selling price per deed of sale, or (2) current BIR zonal valuation. The term "capital asset" means property held for personal use or investment, NOT inventory or dealer property. Once paid, no other income tax is due on the gain - hence the term "final tax." The seller is liable for payment within 30 days from date of sale.
Example:
Maria sells her Quezon City residential lot purchased 15 years ago for ₱8 million. The BIR zonal value is ₱10 million. CGT is computed on ₱10 million (higher amount): ₱10M × 6% = ₱600,000. Maria must file BIR Form 1706 and pay ₱600,000 within 30 days. Buyer pays separate DST of ₱150,000 (₱10M ÷ ₱1,000 × ₱15). Total taxes: ₱750,000.
Section 106 - Value Added Tax on Sale of Real Property
Habitual sellers of real property - developers, realty corporations, subdivision companies - must charge 12% output VAT on gross selling price of properties classified as ordinary assets (dealer inventory). This applies when property is sold within 5 years of acquisition or completion. VAT is mutually exclusive with CGT - you cannot be subject to both on the same transaction. The seller charges VAT to the buyer as a separate line item, collects it, and remits to BIR monthly. Input VAT paid on construction materials, professional fees, and operating expenses can be claimed as tax credits, effectively reducing the net VAT liability.
Example:
Megaworld Corp sells a Makati condo unit completed 2 years ago for ₱7 million. As a habitual dealer, Megaworld charges: Selling Price ₱7,000,000 + 12% VAT ₱840,000 = Total ₱7,840,000. Buyer pays ₱7.84M total. Megaworld remits ₱840,000 VAT to BIR via Form 2550M, minus input VAT credits. Buyer also pays DST of ₱105,000 (₱7M ÷ ₱1,000 × ₱15). NO CGT is charged because transaction is subject to VAT.
Section 196 - Documentary Stamp Tax on Conveyances
Every deed of sale, donation, exchange, or other conveyance of real property must bear documentary stamps to be legally valid and registrable. The DST rate is ₱15.00 for every ₱1,000 (or fractional part thereof) of the consideration (selling price) or BIR zonal value, whichever is higher. This was increased from ₱10 to ₱15 in 2018 under the TRAIN Law. DST is paid by the buyer/transferee and must be affixed to the original deed before submission to the Register of Deeds. Without proper DST payment, the Register of Deeds will refuse to register the transfer, meaning the buyer cannot get a new title in their name.
Example:
Juan buys a Pasig residential house for ₱4.5 million (zonal value: ₱5 million). DST computation uses ₱5M (higher): (₱5,000,000 ÷ ₱1,000) × ₱15 = ₱75,000. Juan pays ₱75,000 to BIR and obtains documentary stamps affixed to the Deed of Sale. Only then can he submit to Register of Deeds for title transfer. If Juan forgot and paid based on ₱4.5M, Register of Deeds will reject the document until deficiency is paid.
Section 57(A) - Creditable Withholding Tax on Rentals
Individuals or corporations leasing real property for business purposes must withhold 5% creditable withholding tax on gross rental payments of ₱10,000/month or more if the lessor is an individual, or 5% if the lessor is a corporation. The lessee (tenant) withholds this amount and remits it to BIR using Form 1601-E within 10 days of the following month, then issues a Certificate of Creditable Tax Withheld (BIR Form 2307) to the lessor. The lessor reports the gross rental income in their annual income tax return and claims the withheld amount as tax credit. This is NOT a final tax - it is merely advance payment of the lessor's income tax liability.
Example:
ABC Corp leases a Makati office space from landlord Pedro for ₱100,000/month. ABC Corp pays Pedro only ₱95,000 (₱100,000 - ₱5,000 withholding) and remits ₱5,000 to BIR via Form 1601-E by the 10th of the following month. At year-end, Pedro reports ₱1.2M gross rental income in his ITR and claims ₱60,000 withheld (₱5K × 12 months) as tax credit against his total income tax due. If Pedro's total tax liability is ₱200,000, he pays only ₱140,000 (₱200K - ₱60K credit).
Section 228 - Filing and Payment Deadlines
All tax returns must be filed within prescribed deadlines to avoid penalties. For CGT on real property sales, BIR Form 1706 must be filed within 30 calendar days from date of sale (not date of title transfer). The 30-day period is computed from the notarization date of the Deed of Sale. For VAT, developers file monthly returns (Form 2550M) by the 20th of the following month and quarterly returns (Form 2550Q) within 25 days after the quarter ends. For withholding tax on rentals, Form 1601-E must be filed within 10 days of the following month. All returns are filed with the BIR Revenue District Office having jurisdiction over the property location.
Example:
Spouses Cruz sold their Cavite land on March 15, 2025 (notarization date). They have until April 14, 2025 (30 days) to file BIR Form 1706 and pay CGT at the BIR RDO in Cavite (where the property is located), even though they reside in Manila. If they file on April 20, they are 6 days late and face 25% surcharge + interest. If the 30th day falls on a weekend/holiday, deadline extends to the next business day.
Real-World Examples
Scenario 1: Individual selling personal residential property held for 12 years
Roberto purchased a Taguig residential house and lot in 2013 for ₱3 million. He sells it in 2025 for ₱9 million. The current BIR zonal value is ₱10 million (higher than ₱9M selling price). As an individual selling a capital asset (personal residence), Roberto is subject to 6% Capital Gains Tax.
Outcome:
CGT = ₱10 million (zonal value) × 6% = ₱600,000 (Roberto pays). DST = (₱10M ÷ ₱1,000) × ₱15 = ₱150,000 (Buyer pays). Roberto must file BIR Form 1706 at the Taguig RDO within 30 days from notarization of Deed of Sale. Total government taxes: ₱750,000. Roberto nets ₱9M - ₱600K = ₱8.4M (before broker fees, transfer fees, RPT arrears).
Scenario 2: Developer corporation selling condominium unit within 2 years of completion
Vista Land completes a Mandaluyong condo tower in 2023. In 2025, they sell Unit 1505 to buyer Anna for ₱6 million. As a habitual dealer selling inventory (ordinary asset) within 5 years, Vista Land cannot use CGT - they must charge 12% VAT instead.
Outcome:
Selling Price: ₱6,000,000 + VAT (12%): ₱720,000 = Total: ₱6,720,000 (Anna pays). Anna also pays DST of ₱90,000 (₱6M ÷ ₱1,000 × ₱15). Vista Land collects ₱720K VAT from Anna and remits it to BIR via monthly Form 2550M, claiming input VAT credits on construction costs. Vista Land pays corporate income tax on the net profit, but NOT CGT. Anna's total cost: ₱6,810,000 (₱6M + ₱720K VAT + ₱90K DST).
Scenario 3: Commercial property owner leasing to corporation
Maria owns a Bonifacio Global City office building and leases 500 sqm to XYZ Corp for ₱500,000/month under a 5-year lease contract starting January 2025. XYZ Corp uses the space for business operations. As the lessee paying rent ≥ ₱10,000/month, XYZ Corp must withhold 5% creditable withholding tax.
Outcome:
Monthly rental: ₱500,000. XYZ Corp withholds: ₱500,000 × 5% = ₱25,000. Net paid to Maria: ₱475,000. XYZ Corp remits ₱25,000 to BIR via Form 1601-E by February 10, 2025 (within 10 days) and issues BIR Form 2307 to Maria. Maria reports ₱6M annual gross rental income (₱500K × 12) in her 2025 Income Tax Return and claims ₱300,000 withheld (₱25K × 12) as tax credit. If Maria also has business income subject to 12% VAT, she charges XYZ Corp additional 12% VAT on rent (₱60,000/month), raising total monthly billing to ₱560,000.
Frequently Asked Questions (8)
Q: CGT vs VAT: Which tax applies when selling real estate?
Capital Gains Tax (CGT) applies to individuals selling real property. Value Added Tax (VAT) applies to corporations or individuals engaged in real estate business. Corporations can opt for CGT if property held for 5+ years. The table below shows when each applies.
CGT vs VAT: When to Use Which?
| Seller Type | Property Held | Tax Applied | Rate | Who Pays |
|---|---|---|---|---|
| Individual (personal use) | Any duration | CGT | 6% of selling price or zonal value (higher) | Seller |
| Corporation | Less than 5 years | VAT (no CGT option) | 12% of selling price | Buyer (added to price) |
| Corporation | 5+ years | CGT or VAT (seller chooses) | 6% (CGT) or 12% (VAT) | Seller (CGT) or Buyer (VAT) |
| Real estate dealer | Any duration | VAT (business income) | 12% | Buyer |
| Foreclosed (bank) | Any duration | CGT (RR 13-2020) | 6% | Bank (seller) |
Q: What is Documentary Stamp Tax and when must it be paid?
Documentary Stamp Tax (DST) is 1.5% of the selling price or zonal value (whichever is higher). It must be paid within 5 days of document execution. Late payment incurs 25% surcharge + 20% annual interest. The table shows DST computation and deadlines.
Documentary Stamp Tax (DST) - Rates & Deadlines
| Document Type | DST Rate | Computation Base | Payment Deadline | Late Penalty |
|---|---|---|---|---|
| Deed of Sale (land/building) | ₱15 per ₱1,000 (1.5%) | Selling price or zonal value (higher) | 5 days from execution | 25% surcharge + 20%/year interest |
| Deed of Donation | ₱15 per ₱1,000 (1.5%) | Fair market value | 5 days | 25% surcharge + 20%/year |
| Mortgage/REM | ₱20 per ₱1,000 (2%) | Loan amount | 5 days | 25% surcharge + 20%/year |
| Lease (3+ years) | ₱3 per ₱1,000 (0.3%) | Total rent for lease period | 5 days | 25% surcharge + 20%/year |
Q: What is the withholding tax rate on rental income?
Creditable Withholding Tax (CWT) on rental income is 5% (individuals) or 5% (corporations) depending on lessor type. Lessees must withhold and remit to BIR monthly via Form 1606. CWT is creditable against annual income tax. The table shows rates.
Creditable Withholding Tax (CWT) on Rental Income
| Lessor Type | CWT Rate | Who Withholds | BIR Form | Filing Deadline |
|---|---|---|---|---|
| Individual (residential) | 5% of gross rent | Lessee (tenant/company) | BIR Form 1606 | 10th day of following month |
| Individual (commercial) | 5% of gross rent | Lessee | BIR Form 1606 | 10th day of following month |
| Corporation | 5% of gross rent | Lessee | BIR Form 1606 | 10th day of following month |
| Government lessor | Exempt | N/A | N/A | N/A |
Q: Do I pay CGT on inherited property when I sell it?
Yes. When you sell inherited property, you pay 6% Capital Gains Tax based on selling price or zonal value (whichever is higher). Inheritance itself is subject to Estate Tax (6% of net estate), but selling the inherited property later triggers CGT separately.
Q: Can I claim CGT as deduction from my income tax?
No. Capital Gains Tax is a FINAL tax, not deductible from regular income tax. It is separate from your annual income tax return (BIR Form 1701/1700). You file CGT via BIR Form 1706 within 30 days of sale.
Q: What happens if I sell below zonal value to avoid high CGT?
BIR will use zonal value as tax base even if you declare lower selling price. Example: You sell for ₱3M but zonal value is ₱5M. CGT computed on ₱5M (₱300K tax), not ₱3M. Underdeclaration can trigger BIR audit and penalties.
Q: How is VAT different from CGT for real estate?
VAT (12%) is charged by seller engaged in business and passed to buyer. CGT (6%) is paid by individual seller. Corporations can choose CGT if property held 5+ years. VAT is creditable (buyer can claim input VAT), CGT is final tax.
Q: What is the penalty for late payment of CGT?
CGT must be paid within 30 days of sale. Late payment incurs: (1) 25% surcharge, (2) 20% annual interest, (3) Possible compromise penalty ₱1,000-₱25,000. Example: ₱300K CGT paid 6 months late = ₱75K surcharge + ₱30K interest = ₱405K total.
Landmark Cases (2)
The Bureau of Internal Revenue assessed the estate of Edita Palanca for deficiency capital gains tax, claiming the sale price declared in the Deed of Sale was lower than the zonal value. The estate argued they should only pay CGT based on the actual selling price stated in the deed. The Supreme Court ruled in favor of the BIR.
Key Ruling:
Relevance: This case established the precedent that BIR zonal values are binding for CGT computation. Real estate sellers cannot undervalue properties to reduce tax liability. This ruling is cited in thousands of CGT assessments annually and is foundational to Section 24(D) enforcement.
Ayala Securities Corporation sold condominium units within 5 years of completion and claimed they should pay VAT instead of CGT. BIR assessed them for CGT, arguing the properties were capital assets. The Supreme Court had to determine whether developer corporations selling inventory are subject to CGT or VAT.
Key Ruling:
Relevance: This case clarified the CGT vs VAT distinction for corporations. Developers must charge VAT on pre-selling and early sales. Only individual sellers and corporations selling non-inventory properties pay CGT. This ruling affects all developer taxation and is critical for real estate tax planning.
Official Sources & References
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Educational purposes only. This content is provided for general information and educational purposes only. It does not constitute legal advice and should not be relied upon as such.
Tax information is based on NIRC 1997 and BIR Revenue Regulations current as of the last update date. Tax laws change frequently. Consult a tax professional or BIR directly.
Professional consultation required. For specific legal concerns, transactions, or disputes, please consult a licensed attorney, relevant government agency (BIR, DHSUD, PRC, Register of Deeds), or qualified tax professional.
Accuracy disclaimer. While we strive for accuracy, laws and regulations change frequently. Information may be outdated. Always verify with official sources (Official Gazette, BIR, DHSUD, Supreme Court).