What everyone ought to know about the Family Home

Family home

A family home is usually the dwelling place in which a married couple, with their children, ordinarily resides. Basically, the family home would be registered in joint names of both spouses, being a conjugal property, except if the house was inherited through succession or bought before the marriage by either of the spouses.

Not everyone knows that the family home can have beneficial effect on taxation. As a tax saving tip, the family home can be exempted from certain taxes, or used as a deduction to minimize or save on taxes.

Your accountant or lawyer should be advising you of the following key tax information where the family home is subject of taxation:

1)      Exemption from Capital Gains Tax. Generally sale of real property not used for business, such as family home is subject to capital gains tax. However, there the proceeds from such sale is to be utilized in in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, such sale is exempt from the capital gains.

This exemption from capital gains tax is subject to the following conditions:

a)      The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired;

b)      The Commissioner shall be duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption;

c)       The said tax exemption can only be availed of once every ten (10) years;

d)      If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax due.

2)      Deduction from Gross Estate or Exemption from Estate Tax. Where the family home is part of the gross estate of a deceased, the same may be written off or deducted up to the amount equivalent to the current fair market value of the decedent's family home not exceeding One million pesos (P1,000,000). As a requisite for the deduction, a barangay certificate of the locality where the family home is located must be submitted.

So before entering into any transaction affecting your family home, be reminded of these tax schemes to save on taxes. 

11 Possible Deductions from your Estate Tax

In computing estate tax, the amount can sometimes be so outrageous and irritatingly hefty it can nearly wipe off the total net amount the heirs will be receiving from the estate of a deceased.

Oh yes, I have definitely encountered widows who wished their husbands have done some estate planning. It is even worse when people have failed to settle their estate taxes for the longest time so that penalties and surcharges have gravely and enormously accrued. This is such a frustrating tax condition because considering the grief/state the heirs might still be in, the last thing they need is the government telling them:   “We are sorry for the death of your loved one, but this is how much you owe us and you still have to pay us”.

Sadly, there is no way getting around it because we have to submit to the power of the government to tax us, even if we are already 6 feet below the ground. Don’t they say that tax, aside from death, is the only thing that is certain on earth? Talk about ironies.

That is why as property owner and/or prospective property owner it won’t hurt to know some key information about estate taxation. Apart from estate planning, (this was already discussed in previous blog) below are some deductions one should consider or prepare for to write off as deductions from the estate of a deceased or decedent.

A)   If the decedent is a Citizen or a Resident, the following deductions are allowed: 

1.    Actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but not to exceed Two hundred thousand pesos (P200,000);

2.      Judicial expenses of the testamentary or intestate proceedings;

3.   Claims against the estate subject to certain documentary requirements such as i) duly notarized debt instrument executed at the time of indebtedness; and ii) if the loan was contracted within three (3) years before the death of the decedent, a statement showing the disposition of the proceeds of the loan;

4.   Claims of the deceased against insolvent persons provided such value is included in the gross estate;

5.    Unpaid mortgages upon, or any indebtedness in respect to, property provided the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate.

6.    Property Previously Taxed. – this deduction is otherwise called vanishing deductions and involves a property previously taxed (for either donor’s or estate tax) because of the death and/or transfer of prior decedent to the present decedent. The amount to be deducted, equal to percentage value of the property, depends on time frame of the death of prior decedent from the death of present decedent. For example, if prior decedent died within one year to the death of the present decedent, the deduction is equal to 100% of the value of the property. Such value to be deducted vanishes by percentage as the time frame of death increases. Below is the table of percentage value to be deducted:

 100% - 1 year from death

                       80%   - More than 1 year from death but not more than 2 years

                       60%   - More than 2 years from death but not more than 3 years

 40%  -  More than 3 years from death but not more than 4 years

 20%  -  More than 4 years from death but not more than 5 years              

7.    Transfers for Public Use. – All amounts given as 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 exclusively public purposes.

8.   Family Home. - An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That if the said current fair market value exceeds One million pesos (P1,000,000), the excess shall be subject to estate tax. This deduction shall be supported by a Certificate by the barangay captain of the locality.

9.    Standard Deduction. - An amount equivalent to One million pesos (P1,000,000).

10. Medical Expenses. - Medical Expenses not exceeding Five Hundred Thousand Pesos (P500,000) incurred by the decedent within one (1) year prior to his death which shall be duly substantiated with receipts.

11.  Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs from the decedent - employee as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917: Provided, That such amount is included in the gross estate of the decedent.

Watch out for my next blog for allowable deductions in case the decedent is a non-resident of the Philippines.