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1st Semester Transfer Taxation Module 3 Estate Taxation - Deductions
1st Semester Transfer Taxation Module 3 Estate Taxation - Deductions
DISCLAIMER: Kindly note that no part of this Module may be reproduced in any form or any means without
the permission (e.g., written or oral) from the Instructor.
MODULE NO. 03
ESTATE TAXATION – DEDUCTIONS
• “Claims” generally mean debts or demands of a pecuniary nature which could have been enforced
against the deceased in his lifetime and could have been reduced to simple money judgments.
Claims against the estate or indebtedness in respect of property may arise out of contract, tort, or
operation of law. [Sec. 6(2), RR 12-2018]
• This consist of the bona fide unpaid personal obligations of the decedent of a pecuniary nature.
These can arise from contract, tort, or by operation of law. These must be incurred in good faith
by the decedent during his lifetime and can be enforced against the estate by his creditors. It must
not have been forgiven by the creditor, or the action to collect must not have prescribed.
• These include personal obligations of the decedent at the time of his death except unpaid
obligations incurred incidental to his death such as funeral or medical expenses.
o The liability represents a personal obligation of the deceased existing at the time of his
death;
o The liability was contracted in good faith and for adequate and full consideration in money
or money’s worth;
o The claim must be a debt or claim which is valid in law and enforceable in court;
o The indebtedness must not have been condoned by the creditor or the action to collect
from the decedent must not have prescribed; and
o They must be reasonably certain in amount, and substantiated
✓ The debt instrument must be duly notarized at the time the indebtedness was
incurred, except for loans granted by financial institutions where notarization is not part
of the business practice/policy.
✓ Duly notarized Certification from the creditor as to the unpaid balance of the debt,
including interest as of the time of death.
✓ Proof of financial capacity of the creditor to lend the amount at the time the loan
was granted, as well as its latest audited balance sheet showing the unpaid balance
of the decedent-debtor.
✓ A statement under oath executed by the administrator or executor of the estate
reflecting the disposition of the proceeds of the loan if it was contracted within 3
years prior to the death of the decedent.
NOTE: Where the settlement is made through the Court in a testate or intestate proceeding,
pertinent documents filed with the Court evidencing the claims against the estate, and the Court
TRANSFER AND BUSINESS TAXATION | ESTATE TAXATION - DEDUCTIONS
Mr. Kireina Otoko M. Manas, CPA
FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
Department of Accountancy
Order approving the said claims, if already issued, in addition to the documents mentioned in the
preceding paragraphs. [Sec. 6(2.2.3), RR 12-2018]
• These are claims of the deceased against insolvent persons as defined under RA 10142 (The
Financial Rehabilitation and Insolvency Act of 2010) and other existing laws, where the value of
the decedent’s interest therein is included in the value of the gross estate. [Sec. 6(3), RR 12-2018]
NOTE: If the insolvent could only pay a partial amount, the full amount owed shall be included in
the gross estate, and the amount uncollectible shall be allowed as a deduction.
EXAMPLE:
E died with a claim against J. J has properties worth P250,000 and obligations of P350,000. It is included
in the obligations of J are P50,000 unpaid taxes owed to the Government of the Philippines and P90,000
payable to Ms. E. The deductible claim against insolvent debtors is PhP___________?
EXAMPLE:
Mr. SS died with a total receivable of P200,000 from Mr. S. The latter was adjudged bankrupt by the
court with only P800,000 total assets but with P2,000,000 in total liabilities.
• Casualty Losses incurred on account of mishaps, accidents, casualties, acts of God, robbery, theft,
embezzlement can be deducted.
NOTE: VALUE TO DEDUCT: The difference of the FMV before and after incurring the loss.
[AMPONGAN].
NOTE: Casualty loss can be allowed as deduction in one instance only, either for income tax or
estate tax purposes. [Sec. 6(A)(5)), Rev. Reg 2-2003]
EXAMPLE:
Y, a Filipino resident, died on November 5, 2018, and his estate incurred losses:
1st From fire on February 2, 2018 of improvement on his property, not compensated by
insurance, P500,000;
2nd From flood on February 25, 2019 of household furniture also not compensated by
insurance, P300,000.
3rd From sale on February 20, 2019 of a property included in the gross estate, P100,000.
4th From theft on April 5, 2019, P300,000, 70% compensated by insurance
5th From robbery on May 5, 2019, P150,000, claimed as deduction from gross income.
EXAMPLE:
Mr. Y died in a fatal car crash on November 2, 2019. The following losses of properties were identified
by his estate administrator:
FOCUS NOTE:
• A loss incurred before or at the date of death is non-deductible.
o The value of the car destroyed on the crash is non-deductible because the car will no longer
be included in the gross estate of the decedent
o If the property is compensated for by insurance, the proceeds of insurance is included in
gross estate, but still no loss deduction is allowed because the same does not affect the
hereditary estate.
o The pilferage loss on inventory will not be deductible since the inventories were lost before
death and are not part of the gross estate.
• The fire loss on the building is not deductible because it is insured. The loss is not actual but
temporary which will be recovered by the estate.
• The loss on an uninsured car caused by a storm is non-deductible as it is beyond 1 year from
the date of death.
• The unpaid loan receivable from a bankrupt customer is a deductible loss but under a separate
category "Claim against Insolvent Person."
• If the loan is an accommodation loan where the loan proceeds went to another person, the value
of the unpaid loan must be included in the gross estate as a receivable.
NOTE: In case the loan of the decedent is only an accommodation loan where the loan proceeds
went to another person, the value of the unpaid loan must be included as a receivable of the estate.
If there is a legal impediment to recognize the same as a receivable of the estate, said unpaid
obligation shall not be allowed as a deduction. In all instances, the mortgaged property, to the
extent of the decedent’s interest therein, should always form part of the gross taxable estate. [Sec.
6(4), RR 12-2018]
NOTE: Unpaid taxes that accrued before the decedent’s death but not including:
o Any income tax upon income received after the death of the decedent;
o Property taxes not accrued before his death; or
o Any estate tax.
• The amount of all bequests, legacies, devises or transfers to or for the use of the Government of
the Republic of the Philippines, or any political subdivision thereof, for exclusive public purposes.
NOTE:
o Transfers made to the government or any political subdivision for public purposes; or
o Transfers to social welfare, cultural, and charitable institutions, provided:
▪ No part of its net income inures to the benefit of any individual; and
▪ ≤ 30% of the bequest, devise, or legacy is used for administrative purposes.
o NO PURELY RELIGIOUS ORGANIZATION
EXAMPLE:
Mr. A devised in his will the following properties:
Commercial Land, to a Public School P 2,000,000
Land and Building, to a GOCC 3,000,000
Total P 5,000,000
• This is an amount allowed to reduce the gross estate where the property was previously subjected
to transfer taxes, either donor’s tax or estate tax.
• There are instances where properties are transferred between persons in short periods of time
causing a series of transfer taxation;
o The death of the decedent is preceded by a donation inter-vivos; and
o LOWER VALUE – Identify the property and its proper value (i.e., the value at the time
previously taxed or the value of the property in the present estate, whichever is lower)
o INITIAL BASIS – Deduct any mortgage or lien paid by the present decedent to arrive at
the initial basis.
o ACTUAL OR FINAL BASIS – From the initial basis, deduct the proportionate amount
based on the ratio of the initial basis over the gross estate for
o Claims against the Estate,
o Claims against Insolvent Persons,
o Unpaid mortgages, Taxes and Casualty Losses, and
o Transfers for Public Purpose [pars. 2, 3, 4 and 6 of Sec. 86(A) of the NIRC]
o RATE – Multiply the actual basis by the applicable rate based on the length of time the
property has been acquired:
NOTE: Under conjugal partnership of gains vanishing is a deduction from exclusive property. Under
absolute community of property, vanishing deduction may be deducted from exclusive property or
community property. If more than one property qualifies for vanishing deduction, the properties
shall be grouped and totaled on a per-year basis.
EXAMPLE:
Decedent was a citizen of the Philippines who was single at the time of death. Compute the vanishing
deduction based on the following information that were made available:
EXAMPLE:
Mr. H, a bachelor, died with the following properties and allowable deductions:
ALLOWABLE DEDUCTIONS
• 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.
• It is deemed constituted on the house and lot from the time it is occupied as the family residence
and considered as such for as long as any of its beneficiaries actually resides therein.
• Temporary absence from the constituted family home due to travel or studies or work abroad, etc.
does not interrupt actual occupancy. The family home is generally characterized by permanency,
that is, the place to which one still intends to return.
• It must be part of the ACP, CPG, or Exclusive Property of the decedent. It may also be constituted
by an unmarried head of a family on his or her own property.
NOTE: For purposes of availing this deduction, a person may constitute only one family home.
[Sec. 6(7.1), RR 12-2018 citing Arts. 152, 153, 156 and 161, Family Code]
EXAMPLE:
A decedent died leaving a family home with a fair value of P 17,000,000 at the date of his death.
The following shall be deductible for family home under each of the following independent cases:
NOTE: When the family home is an exclusive property of the surviving spouse, none of it is reflected in
gross estate. Hence, there should be no deduction for family home in accordance with the matching rule.
• An amount equivalent to P5,000,000 shall be deducted from the gross estate without need of
substantiation.
• Any amount received by the heirs from the decedent’s employer as a consequence of the death of
the decedent-employee in accordance with RA 4917, provided that such amount is included in the
gross estate of the decedent.
• This includes retirement benefits given by private firms with a reasonable private benefit plan, if the
employee is not less than 50 years old and has been with the same employer for at least 10 years.
Such benefit may be availed of only once.
EXAMPLE:
Mr. H, a bachelor, died in a car accident. His heirs received a P1,500,000 termination pay from his
employer on account of Mr. H’s death.
The P1,500,000 termination pay shall be included in gross estate and shall likewise be presented as a
deduction against gross estate.
ALLOWABLE DEDUCTIONS
NET SHARE OF SURVIVING SPOUSE IN CPG/ACP [SEC. 86(C), NIRC; SEC. 6(9), RR 12-2018]
• The amount deductible from the net estate of the decedent is the net share of the surviving spouse
in the conjugal property. The net share is equivalent to ½ of the conjugal property after deducting
the obligations chargeable to such property. The net share of the surviving spouse is neither an
ordinary nor a special deduction.
NOTE: Compare with the Capital of Surviving Spouse which is excluded from the gross estate.
• FORMULA:
Gross CPG/ACP Properties xxx,xxx
Less: CPG/ACP Deductions xxx,xxx
Net CPG/ACP Properties xxx,xxx
Share of the Surviving Spouse xxx,xxx
EXAMPLE:
A married decedent died with the following gross estate and allowable deductions:
Separate Properties of the decedent P 1,200,000
Common Properties 3,800,000
Gross Estate P 5,000,000
NOTE:
• Funeral and judicial expense are no longer deductible in computing taxable estate.
• As a rule, transfer for public use is presumed deductible against exclusive properties of the
decedent as married persons cannot dispose common properties without the consent of the
other spouse.
• Exceptionally, if transfer for public use or vanishing deductions pertain to common properties,
the applicable deduction is against common properties.
NOTE:
• The amount of statutory deduction in the estate tax return is very different with the actual share
of the surviving spouse.
• Though non-deductible in the estate tax return, funeral expense and judicial expense would be
deducted to the common property to extract the net properties of the spouses. Funeral and
judicial expenses are charges against the common fund of the spouses.
• Vanishing deduction is not considered as it is an incentive deduction and does not physically
diminish the properties of the estate.
-NOTHING FOLLOWS-