When selling real estate in the Philippines, one of the biggest sources of confusion is whether a property sale should be taxed under Capital Gains Tax (CGT) or Value-Added Tax (VAT).

Many sellers worry that they might be charged both—but the truth is:

You can only be charged either CGT or VAT, never both.

The National Internal Revenue Code (NIRC) makes these two tax systems mutually exclusive, and the secret lies in one thing:

How the property is classified: Capital Asset or Ordinary Asset.

In this blog, we’ll break down the difference in the simplest way possible and share two real case studies where sellers were almost overcharged — until we stepped in to clarify the rules.

Why You Pay Only One Tax: The Core Principle

Although the law doesn’t spell it out in a single sentence, the NIRC makes it impossible for both CGT and VAT to apply to the same property sale.

Here’s why:

· CGT applies only to capital assets

· VAT applies only to ordinary assets

And since a property can’t be both at the same time, only one tax will apply. Understanding this single principle can save you hundreds of thousands of pesos.

Capital Asset vs. Ordinary Asset: What’s the Difference?

Capital Asset (Subject to 6% CGT)

A capital asset is any property not used in business and not held for sale as part of your trade. This includes properties kept for personal use or long-term investment.

Examples of Capital Assets:

·       Personal homes

·       Vacant lots held for investment

·       Inherited residential properties

·       Condo units NOT used for rental

·       Any property owned by someone NOT engaged in the real estate business

When you sell a capital asset, the transaction is NOT subject to VAT, and the seller pays 6% Capital Gains Tax.

Ordinary Asset (Subject to 12% VAT)

An ordinary asset is a property that is used in business, held for sale, or generated income.

Examples of Ordinary Assets:

·       Developer inventory (subdivision lots, condo units)

·       Rental properties (used to generate business income)

·       Company-owned buildings or warehouses

·       Properties frequently bought and sold as a business activity

If the seller is VAT-registered (or required to be), and the property is an ordinary asset, the sale becomes VATable.

CASE STUDY 1: Corporation-Owned Residential Property (Initially Tagged as VATable)

We handled a case where a corporation, operating a restaurant business, sold a residential property under its name. Because the corporation was VAT-registered, the BIR examiner initially categorized the sale as VATable.

But here’s where correct classification made all the difference.

• The residential property was not used in the corporation’s business
• It did not generate income
• It was not part of inventory
• It was owned simply for personal use

The seller’s accountant presented documentation proving the property was a capital asset. As a result, BIR agreed — the sale was not VATable and was correctly subject only to CGT. This decision saved the seller from an unnecessary 12% VAT charge.

CASE STUDY 2: Business Owner Selling a Residential Lot (Initially Miscomputed as VAT + CGT)

In another transaction, the seller was:

• A business owner (fuel business)
• VAT-registered
• Registered as engaged in business under his TIN

When our processor asked BIR for the tax computation, the examiner initially said:

"VAT + CGT applies because the seller is a business owner who is VATable."

This assessment was worse than the first case because the examiner suggested charging both VAT and CGT.

This was incorrect.

Why VAT Should NOT Apply:

• VAT depends on property classification — not the seller’s business nature
• The property was a residential lot
• It was NOT used in the fuel business
• It was NOT rented out
• It was NOT business inventory
• It generated zero business income

BIR typically validates this by conducting an ocular inspection and reviewing income records.

We presented the information above to the examiner and as a result, the BIR examiner agreed that the property was a capital asset, not an ordinary asset. Therefore, only CGT applied — no VAT. This correction prevented the seller from being charged taxes he didn’t owe.

Key Takeaway: Property Classification Determines the Tax — Not the Seller’s Status

Even if the seller is:

• A corporation
• A VAT-registered business owner
• Engaged in trade
• Paying percentage tax or VAT regularly

If the property was not used in business, it remains a capital asset.

And if it’s a capital asset, the sale is subject only to CGT, without VAT. This is the biggest misconception among sellers — and unfortunately, even among some BIR examiners and new agents.

Why You Need an Experienced Real Estate Professional

Real estate transactions are high-value, and one wrong assumption can lead to:

• Overpayment of taxes
• Delays in computation
• Misclassification of property
• Penalties for incorrect filings

A knowledgeable real estate agent ensures:

✔ You pay the correct taxes ✔ Your documents are complete ✔ Your transaction is protected ✔ You avoid unnecessary charges ✔ You don’t get lost in BIR processes ✔ Miscomputations are corrected before final assessment

In the two cases above, sellers would have paid hundreds of thousands in excess taxes if we didn’t intervene.

The "CGT vs VAT" confusion happens more often than people realize. But once you understand the logic, it becomes simple:

• CGT applies to capital assets
• VAT applies to ordinary assets
• You can never be charged both

Knowing this protects you from costly mistakes and empowers you to make smarter decisions when selling your property.

If you want expert guidance for your next property sale or purchase, I’d be happy to help — from reviewing property classification to handling tax computations, documentation, and closing.

📱 Message me on WhatsApp: +63 917 851 2752 📩 Or send me an email for a consultation.

Your property transaction deserves accuracy, confidence, and expert care.

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