Pamantasan ng Lungsod ng Valenzuela

College of Business and Accountancy

Department of Accountancy

BUSINESS AND TRANSFER TAXATION (TAX2)

Deductions from Gross Estate

Deductions are items which the law on estate tax allows, as amended, to be subtracted from the value of the gross estate in order
to arrive at the net taxable estate. As a rule, deductions from gross estate are presumed to be common deductions unless specifically
identified as exclusive.

ORDINARY DEDUCTIONS – classified as exclusive or common deduction

1. LOSSES, INDEBTEDNESS, TAXES, etc. (LITe)

a. Casualty Losses
Requisites:
 Incurred during the settlement of the estate. Settlement period is the period allowed by law to file and pay estate
tax as follows:
o Decedent died before 2018 – within six (6) months after death
o Decedent died on or after Jan. 1, 2018 – within one (1) year after death
 Arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement
 Not compensated by insurance
 Not claimed as deduction for income tax purposes
 Incurred not later than the last day for the payment of the estate tax
Amount Deductible – the value of the property lost.

Illustration 1
Various types of losses were incurred by a decedent/estate as follows:
 Loss due to typhoon, a day before the decedent’s death, P1,000,000.
 Loss due to shipwreck, two (2) months after the decedent’s death, P500,000.
 Loss due to robbery, eight (8) months after the decedent’s death, P2,000,000.
 Swindling loss incurred 2 months before death, P800,000.
 Gambling losses before death, P2,250,000.

Required:
 How much is the deductible “losses” from the gross estate of the decedent?
 How much is the deductible “losses” from the gross estate of the decedent assuming the robbery loss was incurred 1 ½ years after
the decedent’s death?

b. Indebtedness or Claims Against the Estate

Requisites:
 Personal debt of the decedent existing at the time of his death
 Contracted in good faith
 Must be valid in law and enforceable in court
 Must not have been condoned by the creditors
 Must not have prescribed
Substantiation Requirements:
 In case of Simple Loans including Advances
o A Duly Notarized Certification from the Creditor as to the unpaid balance of the debt including interest
as the date of death. The Sworn Certification shall be signed by:
CREDITOR SIGNATORY
If Creditor is a Corporation The President or Vice-President or Other
Principal Officer of the Corporation
If Creditor is a Partnership Any of the general partners
If Creditor is a Bank/Financial Institution Branch manager of the Bank or Financial
Institution which monitors and managers the
loan of the decedent-debtor
o If said loan is contracted within three (3) years prior to the death of the decedent: A Statement under
Oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds
of the loan.
 If the unpaid obligation arose from Purchase of Goods or Services:
o Pertinent documents evidencing the purchase of goods or service, such as sales invoice, delivery
receipts, official receipts.
o A Duly Notarized Certification from the Creditor as to the unpaid balance of the debt including interest
as the date of death. The Sworn Certification shall be signed by (same as signatory for simple loan)
o In any of the cases above, the one who should certify must not be a relative of the borrower within the
fourth civil degree, either by consanguinity or affinity
Amount Deductible – the amount of debt that will qualify in the above requirements

1
Deductions from Gross Estate TAX2

c. Unpaid Mortgage
Requisites:
 The fair market value of the mortgaged property undiminished by the mortgage indebtedness should be included
in the gross estate
 Contracted in good faith
 For an adequate and full consideration
Amount Deductible – the amount of unpaid mortage

d. Unpaid Taxes
Requisites – the tax must have accrued before the death of the decedent
Amount Deductible – unpaid taxes that accrued before the decedent’s death but not including (Sec. 6.4.2 of RR 12-2018):
1. Any income tax upon income received after death
2. Property taxes not accrued before death, and
3. Estate tax from the transmission of his estate.

e. Claims Against Insolvent Persons

Requisites:
 Value of the claims is included in the gross estate; and
 The insolvency of the debtor must be established.
Amount deductible – the amount of claims/receivable that cannot be collected.

Note: Beginning January 1, 2018 or upon effectivity of the TRAIN Law, the following expenses are no longer allowed as deduction from
the gross estate of a decedent: (1) Funeral Expenses, (2) Medical Expenses, (3) Judicial Expenses.

Illustration 2
The heirs of a resident citizen decedent with a total gross estate of P15,000,000 provided the following data:
Receivable from Juan, a debtor P 500,000
Amount collectible from Juan 400,000
Unpaid taxes on the estate before death 150,000
Unpaid taxes on the estate after death 50,000
Unpaid mortgage on the estate 200,000
Funeral expenses 82,000
Unpaid loans arising from debt instruments (notarized) 125,000
Unpaid loans arising from debt instruments (not notarized) 75,000
Casualty loss 65,000

Required:
Determine the total amount of allowable deduction from gross estate of the decedent including applicable special deduction.

2. TRANSFER FOR PUBLIC USE (TFPU)

Requisites:
 Given to the Government of the Philippines (National or Local)
 Must be testamentary in character or
 By the way of donation mortis causa executed by the decedent before his death
 Exclusively for public purpose
Amount deductible – amount of all bequests, legacies, devises, or transfers to or for the use of the Government of the Philippines,
or any of its political subdivisions.

3. VANISHING DEDUCTION (PROPERTY PREVIOUSLY TAXED)

Requisites:
 The decedent died within 5 years from receipt of the property from a prior decedent OR donor
 The property is located in the Philippines
 The property must have formed part of the taxable estate of the prior OR the taxable gift of the donor and the transfer tax
(estate tax or donor’s tax, as the case may be) relative there had been paid
 The property on which vanishing deduction is being taken must be identified as the one received from the prior decedent,
or from the donor, or something acquired in exchange therefore
 No vanishing deduction on the property was allowable to the estate of the prior decedent
Amount deductible: (PROFORMA COMPUTATION)
Value to take (lower between FMV at the time of death vs. FMV at the time of inheritance
OR donation) P xxx
Less: Mortgage paid by present decedent (on mortgage assumed) (xxx)
Initial Basis (IB) P xxx
Less: Proportional Deduction [(IB/GE) x (LITe + TFPU)] (xxx)
Final Basis P xxx
Rate xx%
VANISHING DEDUCTION P xxx

2
Deductions from Gross Estate TAX2

Rate of Vanishing Deduction:

Interval of Acquisition (inheritance or
RATE
donation) and death of present decedent
Within 1 year 100%
More than 1 year but not more than 2 years 80%
More than 2 years but not more than 3 years 60%
More than 3 years but not more than 4 years 40%
More than 4 years but not more than 5 years 20%

Illustration 3
Juan, a Filipino residing in Davao died on December 10, 2023, leaving a gross estate of P45,000,000 including a parcel of land valued at
P11,250,000, which he inherited from his father who died on October 5, 2020. Other facts are as follows:
 that the land was previously taxed with a fair value of P9,375,000 for estate tax purposes in the estate of his father
 that the land was subjected to a mortgage of P4,687,500 at the time it was inherited by the present decedent, which amount was
deducted from the net estate of the father
 that the preset decedent paid P1,875,000 of the mortgage indebtedness
 that the total deductions claimed for expenses, losses, including the unpaid mortgage of P2,812,500 was P5,625,000.

Required:
Determine the correct amount of vanishing deduction, if any.

SPECIAL DEDUCTIONS
Summary
Citizen / Resident Decedent NRA Decedent
 Standard Deduction P 5,000,000 P 500,000
 Family Home
o Purely exclusive FMV but not to exceed P10M
o Purely common FMV / 2 but not to exceed P10M Not allowed
o Mixed (exclusive and common) Add the properties applying the foregoing rules
but the total amount shall not exceed P10M
 Benefits under RA 4917 Amount of death benefit Not allowed

1. STANDARD DEDUCTION
Amount deductible: the amount deductible without any required substantiation is P5,000,000 if the decedent died on or after
January 1, 2018. A standard deduction of P500,000 shall also be allowed to nonresident alien decedent beginning April 1, 2018.

2. FAMILY HOME ALLOWANCE

Requisites:
 The decedent is married or head of a family
 The family home must be the actual residential home of the decedent and his family at the time of his death, as certified
by the Brgy. Captain of the locality the family home is situated
 It is located in the Philippines
 The value of the family home is included in the gross estate
Amount deductible: the LOWER between the Actual Interest and the Limit.
Actual Interest
 Purely Exclusive – 100% FMV
 Purely Common Property – 100% FMV / 2
 MIXED
Exclusive Property (100%) P xxx
Add: Common Property (100% / 2) xxx
Total P xxx

Illustration 4
Determine the deductible family home in 2018 from the following independent cases:
Case Particulars Family Home
A Decedent is single 10,000,000
B Decedent is a head of a family 5,000,000
Decedent is married. The family home is the exclusive property of the
B
surviving spouse 8,000,000
Decedent is married. The family home is the exclusive property of the
D
decedent 10,000,000
E Decedent is married. The family home is classified as conjugal property. 12,000,000
Decedent is married. Fifty percent (50%) of the family home is classified as
F
conjugal property, the remainder is the exclusive property of the decedent. 10,000,000

3. AMOUNT RECEIVED BY HEIRS UNDER R.A 4917

Requisites – include such amount in the gross estate
Amount deductible – amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-
employee.

3
Deductions from Gross Estate TAX2

SHARE OF THE SURIVING SPOUSE

 Applicable only to married decedents
Amount deductible:
Common Properties Pxx
Less: Common Deductions (xx)
Net Common Properties before special deductions Pxx
Multiply by: 50%
Share of the Surviving Spouse Pxx

Illustration 5
A resident decedent, head of the family, died leaving the following properties and obligations:
Cash in bank, 50% donated mortis causa to Nat’l Gov’t; 50% to Q.C. Gov’t P 300,000
House and lot in Makati, Family Home 1,500,000
Other real properties 15,000,000
Farm lot 825,000
Claim against an insolvent debtor 225,000
Transfer in contemplation of death (gratuitous) 1,250,000
Transfer passing under special power of appointment 75,000

Deductions Claimed:
Funeral expenses 575,000
Judicial expenses 67,500
Donation mortis causa to Quezon City government 150,000
Unpaid mortgage on the farm lot 75,000

The farm lot was inherited 5 ½ years ago by the decedent before his death with a value then of P575,000 and a mortgage indebtedness of
P150,000.

Required:
Determine the following:
1. The taxable net estate
2. The taxable net estate assuming the farm lot was inherited five (5) years ago.

- END OF COURSE FILE -

References
Tabag, E. D., & Garcia, E. J. (2022). Transfer & Business Taxation.