DEDUCTIONS FROM

GROSS ESTATE
Ordinary Deductions:
Losses, Indebtedness and Taxes
JISRYL H. RAZ
Allowable Deductions from Gross
Estate
• In the computation of net taxable estate, the
gross estate of the decedent shall be reduced by
items allowed in the Tax Code, as amended, to
be deducted.
• These items are categorized three:
• Ordinary Deductions
• Special Deductions
• Share of the Surviving Spouse
 Allowable Deductions from Gross
Estate Residents and Citizens Non-Resident Aliens(PGE/WE)
X
ORDINARY DEDUCTIONS WORLD LITE
Losses, Indebtedness and
YES YES
Taxes (LIT)
Transfer for Public Use (TPU) YES YES
Vanishing Deduction YES YES

SPECIAL DEDUCTIONS
Family Home YES NO
Standard Deduction YES YES
Benefits under RA 4917 YES NO
SHARE OF SURVIVING
YES YES
SPOUSE
Points to Remember
1. Deductions related to exclusive properties are
deducted from the exclusive properties, and deductions
related to the conjugal/communal properties are also
deducted from such.
2. Deductions which are unattributable to whether
exclusive or conjugal are presumed deductible from
conjugal property.
3. All deductions must be duly substantiated, except the
Standard Deduction.
ORDINARY DEDUCTIONS:
Losses, Indebtedness, and Taxes (LIT)
Losses incurred during the settlement of the Estate
• May arise from fires, storms, shipwreck, or other casualties, or
from robbery, theft or embezzlement and may be claimed as
deduction.
• Provided that, such losses are not compensated for by
insurance or if insured, only the amount to the extent not
covered for by the insurance may be claimed.
• Such losses have not been claimed as a deduction for the
income tax purposes in an income tax return,
• Such losses were incurred not later than the last day for the
payment of the estate tax (within 1 year after death).
ORDINARY DEDUCTIONS:
Losses, Indebtedness, and Taxes (LIT)
Example:
Juan, married to Maria, died on February 10, 2020
leaving a total estate of P 25,000,000, of which P
17,000,000 were classified as communal, while
the P 8,000,000 were exclusive to Juan. The
following losses were incurred:
ORDINARY DEDUCTIONS:
Losses, Indebtedness, and Taxes (LIT)
Example:
Property Date Incurred Amount of Loss
Office Building (communal) July 31, 2020 P 970,000 Non-Deductible
Personal gadgets (exclusive) July 31, 2020 P 120,000 P 120,000 (exclusive)
Vehicle (exclusive) February 15, 2021 P 500,000 Non-Deductible (> 1year)
Apartment (communal) November 17, 2020 P 900,000 P 500,000 (communal)

• The loss from office building was claimed as an itemized

deduction on his income tax for year 2020, all other losses
were claimed for estate tax.
• The vehicle was insured for an amount of P 200,000.
• The apartment building was also insured for P 400,000.
ORDINARY DEDUCTIONS:
Losses, Indebtedness, and Taxes (LIT)
Indebtedness
• Indebtedness are any amount of debts which
remains unpaid upon the death of the decedent
• They could be:
• Claims Against the Estate
• Claims of the Deceased Against Insolvent
Persons
• Unpaid mortgages or any indebtedness
ORDINARY DEDUCTIONS:
Losses, Indebtedness, and Taxes (LIT)
Indebtedness: Claims against the Estate
• These are obligations of the decedent to creditors which
remain unpaid upon the death of the decedent.
• The indebtedness was duly notarized and, if the loan was
contracted within three (3) years before the death of the
decedent, the administrator or executor shall submit a
statement showing the disposition of the proceeds of the
loan.
• A verification as to the beneficiary of proceeds must be
made.
• In case of accommodation only, the amount must also be
claimed as receivable included in the gross estate
ORDINARY DEDUCTIONS:
Losses, Indebtedness, and Taxes (LIT)
Example:
Juan is a resident of Pasig who died due to accident on March 25,
2021. On his death, several creditors claimed repayments for
Juan’s outstanding obligations which were as follows:
Amount of
Creditor Purpose Date Contracted
Debt
Pedro House Renovation (house July 31, 2016 P 1,000,000
is communal)
Maria Used in his exclusive September 31, P 1,400,000
farm 2020
ABC Bank Hospitalization of Wife February 15, 2021 P 2,500,000
DEF Bank For his Brother, Wan, as November 4, 2020 P 1,000,000
an accommodation
ORDINARY DEDUCTIONS:
Losses, Indebtedness, and Taxes (LIT)
Indebtedness: Claims against Insolvent Persons
• These are loans or obligations of a debtor to the
decedent which remains unpaid and for which the court
found the related debtor insolvent.
• For claims of the deceased against insolvent persons
where the value of decedent’s interest therein is
included in the value of the gross estate
ORDINARY DEDUCTIONS:
Losses, Indebtedness, and Taxes (LIT)
Example:
Juan is a resident of Pasig who died due to accident on March 25,
2021. On his death, he had several claims against debtors who still
have not fully paid their indebtedness to him as follows:
Amount of
Debtor Status of the Debtor Date Contracted
Debt
John Capable of Paying July 31, 2020 P 500,000
Maria Found Insolvent by the September 31, 2020 P 300,000
Court
Peter Nowhere to be found February 15, 2018 P 700,000
Luke Asking for Payment November 4, 2019 P 400,000
Extension
ORDINARY DEDUCTIONS:
Losses, Indebtedness, and Taxes (LIT)
Indebtedness: Unpaid Mortgages
• Unpaid mortgages or any indebtedness shall be limited
to the extent that they were contracted and for an
adequate and full consideration in money or money’s
worth.
• For unpaid mortgages in respect to a property, the value
of decedent’s interest therein must be included in the
gross estate, undiminished by such mortgage or
indebtedness.
ORDINARY DEDUCTIONS:
Losses, Indebtedness, and Taxes (LIT)
Example:
The gross estate of Juan, who was a married decedent, was
P 3, 500, 000, wherein P 820, 000 was inherited from his
mother who died four years ago. The inherited property
has an unpaid mortgage of p 200, 000, whereby 60 % of it
was paid during the lifetime of Juan.

The remaining unpaid mortgage which is 40% of P

200,000 may be claimed as a deduction against the
exclusive gross estate, the property inherited being
exclusive.
ORDINARY DEDUCTIONS:
Losses, Indebtedness, and Taxes (LIT)
Accrued and Unpaid Taxes
Taxes must have accrued but not paid as of the time of
death.
The following are non-deductible:
• Income tax for income received after death
• Property tax not accrued prior to death
• Estate tax
ORDINARY DEDUCTIONS:
Losses, Indebtedness, and Taxes (LIT)
Example:
Juan, married, died on January 2, 2021 with few unpaid taxes
below.
Accrued Amount of
Tax Object Date Due
Tax Tax
Income Tax Juan’s Net Income in April 15, 2021 P 300,000
2020 ✓
Property Tax Real Property of Juan April 20, 2021 P 100,000
(exclusive) for year 2021 Must be accrued prior to death
Percentage For Juan’s 2020 4th January 25, 2021 P 250,000
Tax Quarter’s Sales
Deducted for income tax
Estate Tax For Juan’s taxable estate January 2, 2022 P 400,000

Estate Tax could never be

deducted
DEDUCTIONS FROM
GROSS ESTATE
Ordinary Deductions:
Transfer for Public Use and Vanishing
Deduction
JISRYL H. RAZ
 Allowable Deductions from Gross
Estate Residents and Citizens Non-Resident Aliens

ORDINARY DEDUCTIONS
Losses, Indebtedness and
Taxes (LIT)
YES YES ✓
Transfer for Public Use YES YES
Vanishing Deduction YES YES

SPECIAL DEDUCTIONS

Family Home YES NO

Benefits under RA 4917 YES NO

SHARE OF SURVIVING
YES YES
SPOUSE
ORDINARY DEDUCTIONS:
Transfer for Public Use
• These are donations and contributions, by virtue of
death, to:
• Government or its political subdivisions;
• Non-government organizations (accredited)
• Charitable and religious institutions
• These are actually exemptions from estate tax provided
that not more than 30% are used for administrative
purposes and the income of such institutions does not
inure to the benefit of private individuals (such as
distribution of profits through dividends).
ORDINARY DEDUCTIONS:
Transfer for Public Use
• The disposition must be in the last will and testament
which shall take effect after death in favor of the
Philippine Government and for exclusive public
purpose.
• Bequest, legacies and other charitable disposition of the
estate in favor of social, cultural, and other charitable
institutions can be claimed as transfer for public use,
provided, that not more than 30% of the said bequest or
legacies is used for administrative purpose.
ORDINARY DEDUCTIONS:
Transfer for Public Use
Example:
Juan, on his last will and testament, made a donation
to Philippine Red Cross in the form of cash
amounting P 2,000,000, and a transfer of his idle real
property to the City Government of Butuan. The
property has a fair value of P 10,000,000. All transfers
will be taken from the estate’s free portion.

How will these transfer be exempted from estate tax?

ORDINARY DEDUCTIONS:
Transfer for Public Use
Answer:
The donation to the Philippine Red Cross (cash donation) and the
transfer to the City Government of Butuan (real property) will be
both exempted from estate tax and thus be deducted from the
gross estate if the following conditions are met:
• Not more than 30% of the cash donation are used for
administrative purposes (for the Philippine Red Cross);
• Not more than 30% of the property donated is used for
administrative purpose (for the City Government of Butuan);
• The income of such institutions does not inure to the benefit of
private individuals.
ORDINARY DEDUCTIONS:
Vanishing Deductions
• Vanishing Deductions, also known as Property Previously
Taxed, are allowed to be deducted from the decedent’s gross
estate but the amount to be deducted are diminished depending
on the years gap from the prior transfer.
Situation:
Juan died on November 1, 2018 and transferred his only property
left to Pedro, his son. Three years later, Pedro died due to car
accident. The only property left by Pedro was that property he
inherited from his father.
In this case, the property from the first transfer (from Juan to Pedro) was
already subjected to transfer tax (estate tax). And three years after, the
property will again be subject to another transfer tax (estate tax) when
Pedro died.
ORDINARY DEDUCTIONS:
Vanishing Deductions
Purpose of Vanishing Deduction
• To minimize the effects of a double tax on the same property
within a short period of time.

Conditions for Allowance

• There is a property forming a part of the gross estate of the
present decedent situated in the Philippines;
• The present decedent acquired the property by inheritance or
donation within 5 years prior to his death;
• The property was previously taxed upon inheritance or gift.
ORDINARY DEDUCTIONS:
Vanishing Deductions
Amount of Vanishing Deduction
• The amount to be deducted as vanishing deduction may be claimed
as follows depending on the interval between the prior transfer
(inheritance or gift) to the death of the current decedent:
More than Not more than Percentage
0 1 years 100%
1 years 2 years 80%
2 years 3 years 60%
3 years 4 years 40%
4 years 5 years 20%
5 years xxx 0%
ILLUSTRATION:
The following information is provided by the executor of a married
decedent:
a. Exclusive property (fair market value of P 1,450,000 when inherited
3 ½ years ago and was subjected to a mortgage of P 450,000 at that
time); fair value at the time of death P 1,300,000.
b. Conjugal properties of the decedent husband and surviving wife, P
4,700,000.
c. Unpaid mortgage on inherited property, P 350,000.
d. Judicial expenses incurred after the death in connection with the
estate settlement, P 320,000
e. Other obligations, P 570,000.

Compute the amount of vanishing deduction.

ILLUSTRATION:
Step 1: Compute the gross estate.
a. Exclusive property (fair market value of P 1,450,000 when inherited
3 ½ years ago and was subjected to a mortgage of P 450,000 at that
✓
time); fair value at the time of death P 1,300,000.
b. Conjugal properties of the decedent husband and surviving wife, P
4,700,000. ✓
c. Unpaid mortgage on inherited property, P 350,000.
d. Judicial expenses incurred after the death in connection with the
estate settlement, P 320,000
e. Other obligations, P 570,000.

The Total Gross Estate is P 6,000,000 (P 1,300,000 exclusive and P

4,700,000 conjugal)
ILLUSTRATION:
Step 2: Determine the initial value of the property previously
taxed.
• An initial value is the lower between the fair value at the time of
transfer (inheritance or gift) and the fair value at the time of
death of the decedent.
Exclusive property (fair market value of P 1,450,000 when
inherited 3 ½ years ago and was subjected to a mortgage of P
450,000 at that time); fair value at the time of death P
1,300,000.

The initial value is P 1,300,000, the fair value at the time of death
because it is the lower amount.
ILLUSTRATION:
Step 3: Determine if there are any mortgages paid by the decedent
prior to his death.
• If there are any paid mortgage, the initial value shall be reduced by the
paid mortgage.
• Exclusive property (fair market value of P 1,450,000 when
inherited 3 ½ years ago and was subjected to a mortgage of P
450,000 at that time); fair value at the time of death P 1,300,000.
• Unpaid mortgage on inherited property, P 350,000.
The property was subject to a mortgage of P 450,000, but at the time of
death of the decedent the mortgage was only P 350,000. Thus, the
decedent had already paid P 100,000.
Hence, the initial value shall be reduced by P 100,000. Therefore, the
new initial basis shall be P 1,200,000 (Initial Value P 1,300,000 minus P
100,000 paid mortgage).
ILLUSTRATION:
Step 4: The New Initial Basis shall be further reduced by a
portion of LIT plus Transfer for Public Use.
• The new initial basis shall be reduced by a portion of LIT
(Losses, Indebtedness and Taxes) and Transfer for Public Use.
• In the problem, the following were given:
• Unpaid mortgage on inherited property, P 350,000. ✓
• Judicial expenses incurred after the death in connection
with the estate settlement, P 320,000 ✘
• Other obligations, P 570,000. ✓
There was no transfer for public use, thus, only the unpaid mortgage and
the other obligations shall be used.
ILLUSTRATION:
Step 4: The New Initial Basis shall be further reduced by a
portion of LIT plus Transfer for Public Use.

Unpaid mortgage on inherited property P 350,000

Other obligations P 570,000
Total P 920,000
Multiplied by: NIB/TGE 1.2M/6M
Deductible Portion from New Initial Basis P 184,000

The Final Basis shall be P 1,016,000 (P 1,200,000

less P 184,000).
ILLUSTRATION:
Step 5: Determine the interval between the prior transfer to the
present death.
Exclusive property (fair market value of P 1,450,000 when
inherited 3 ½ years ago and was subjected to a mortgage of P
450,000 at that time); fair value at the time of death P
1,300,000.
More than Not more than Percentage
0 1 years 100%
1 years 2 years 80%
2 years 3 years 60%
3 years 4 years 40%
4 years 5 years 20%
5 years xxx 0%
ILLUSTRATION:
Step 6: Multiply the final basis by the percentage of vanishing
deduction to arrive at the Vanishing Deduction.

Final Basis P 1,016,000

Multiplied by: 40%
Vanishing Deduction P 406,400
 SUMMARY OF STEPS IN COMPUTING
VANISHING DEDUCTION
The lower between the FV at the time of transfer
INITIAL VALUE either thru gift or inheritance and the FV at the
time of death of the decedent.
LESS: MORTGAGE If the property was subjected to mortgage; zero if
PAID no mortgage was paid on the property.

The Final Basis will be multiplied by

a rate based on the table given (0%,
NEW INITIAL 20%, 40%, 60%, 80% or 100%).
BASIS
X LIT + TPU
TOTAL GROSS
ESTATE

NEW INITIAL BASIS

_ Deductible Portion = FINAL BASIS
DEDUCTIONS FROM
GROSS ESTATE
Special Deductions:
Family Home, Standard Deduction
and RA 4917
JISRYL H. RAZ
SPECIAL DEDUCTIONS
• Only residents and citizens have the privilege of claiming
special deductions.
• In the old NIRC, for example, the Standard Deduction of P
1,000,000 was only available for resident citizens, resident
aliens and non-resident citizens.
• But with RA 10963 (TRAIN Law), non-resident aliens could
now enjoy a standard deduction of P 500,000, while others
could deduct an amount of P 5,000,000.
SPECIAL DEDUCTIONS:
Standard Deduction
• In the case of a citizen or resident of the Philippines, by
deducting from the value of the gross estate a standard
deduction of P 5,000,000. Sec. 86 (A) (1) of the NIRC as amended by
RA 10963
• In the case of a non-resident aliens, by deducting from the
value of that part of his gross estate which at the time of his
death is situated in the Philippines a Standard Deduction
equivalent to five hundred thousand pesos (P 500,000). Sec. 86
(B) (1) of the NIRC as amended by RA 10963
• The standard deduction may be deducted without the need of
substantiation.
SPECIAL DEDUCTIONS:
Family Home
• 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 Barangay Captain.
• The family home, at its fair value at the time of death, must be
declared and included in the gross estate of the decedent.
• The amount deductible must be equivalent to the current fair
market value of the decedent’s family home, but not to exceed
ten million pesos (₱10,000,000).
• If the family home is a conjugal property, it must be divided
into two.
SPECIAL DEDUCTIONS:
Family Home
Example: Family Home as Exclusive Property
Juan died leaving his only exclusive property, residential
house and lot, to his wife, Maria. The fair value of the
property was P 8,000,000.

In Juan’s exclusive gross estate, the property must be

included so he can deduct the same. The maximum
deductible amount is P 8,000,000.
SPECIAL DEDUCTIONS:
Family Home
Example: Family Home as Exclusive Property
Juan died leaving his only exclusive property, residential
house and lot, to his wife, Maria. The fair value of the
property was P 11,000,000.

In Juan’s gross estate, the property must be included so he

can deduct the same. The maximum deductible amount is
P 10,000,000 despite the fair value at P 11,000,000.
SPECIAL DEDUCTIONS:
Family Home
Example: Family Home as Communal
Juan died leaving their residential house and lot, to his
wife, Maria. The property was part of the community
property and is fairly valued at P 15,000,000.

In Juan’s communal gross estate, the property must be

included so he can deduct the same. The maximum
deductible amount is P 7,500,000 (P 15,000,000 divided
by 2).
SPECIAL DEDUCTIONS:
Family Home
Example: Family Home as Communal
Juan died leaving their residential house and lot, to his
wife, Maria. The property was part of the community
property and is fairly valued at P 21,000,000.

In Juan’s communal gross estate, the property must be

included so he can deduct the same. The maximum
deductible amount is P 10,000,000 (P 21,000,000 divided
by 2 is equal to P 10,500,000).
SPECIAL DEDUCTIONS:
Family Home
Example: Partly Exclusive and Communal
Juan, married to Maria since 2005, died leaving a property – their
residential house and lot, to his wife. The following information
were given:
Lot acquired by Juan on 2006 as a
gift from his father, FMV is P 4,500,000
House constructed using conjugal funds
Construction Cost (completed in 2007) 8,000,000
Fair value upon death 10,000,000
SPECIAL DEDUCTIONS:
Family Home
Example: Partly Exclusive and Communal
Lot acquired (exclusive of Juan) P 4,500,000
Fair Value of the house upon death (communal) 10,000,000
Amount to be included in the gross estate P 14,500,000

DEDUCTIBLE FAMILY HOME:

Lot acquired (exclusive of Juan) P 4,500,000
½ of Fair Value of the house (communal) 5,000,000
Deductible Amount P 9,500,000
SPECIAL DEDUCTIONS:
RA 4917 (Retirement Benefits Act)
• As already discussed, any benefits received upon retirement or
upon death of the decedent in pursuant to RA 4917 is
EXEMPTED from any taxes.
• However, as a requisite, despite being exempted from the tax,
the amount must be fully included in the gross estate.
• Also, the same amount must be deducted from the gross estate
under special deductions.
DEDUCTIONS FROM
GROSS ESTATE
Share of the Surviving Spouse

JISRYL H. RAZ
 Allowable Deductions from Gross
Estate Residents and Citizens Non-Resident Aliens

ORDINARY DEDUCTIONS
✓
Losses, Indebtedness and
YES YES
Taxes (LIT)
Transfer for Public Use (TPU) YES YES
Vanishing Deduction YES YES

SPECIAL DEDUCTIONS ✓
Family Home YES NO
Standard Deduction YES YES
Benefits under RA 4917 YES NO
SHARE OF SURVIVING
YES YES
SPOUSE
SHARE OF THE SURVIVING SPOUSE
• For single and unmarried decedent, the computation
of estate tax is simple and straightforward as there is
no need to determine whether properties or
deductions are exclusive or communal.
• However, for married decedent, the share of the
surviving spouse from the conjugal or communal
property is allowed as deduction from total gross
estate to arrive at net taxable estate.
ILLUSTRATION
Juan, married to Maria, died leaving the following:
• Family Home, exclusive to Juan P 13,000,000
• Other Exclusive Properties 7,600,000
• Communal Properties 15,000,000
Deductions claimed:
• Unpaid obligations 1,500,000
• Losses on communal properties, occurred 3 months
after death due to fire, with P 100,000 insurance 500,000
• Donation mortis causa to City Gov’t. of Makati
from exclusive properties 780,000
 In this example, the family home is an exclusive
SOLUTION: property. What if it is a communal property?

Exclusive Communal Total

Family Home, exclusive to Juan P 13,000,000 P 13,000,000
Other Exclusive Properties 7,600,000 7,600,000
Communal Properties P 15,000,000 15,000,000
TOTAL P 20,600,000P 15,000,000P 35,600,000
ORDINARY DEDUCTIONS:
Unpaid obligations ( 1,500,000) ( 1,500,000)
Losses on communal properties ( 400,000) ( 400,000)
Transfer for Public Use (exclusive) ( 780,000) ( 780,000)
ESTATE AFTER ORD. DED. P 19,820,000P 13,100,000P 32,920,000
SPECIAL DEDUCTIONS:
Standard Deduction ( 5,000,000)
Family Home ( 10,000,000)
SHARE OF THE SPOUSE (13,100,000 / 2) ( 6,550,000)
NET TAXABLE ESTATE P 11,370,000
 In this example, the share of the surviving
SOLUTION: spouse of P 13,050,000 already includes her
share in the family home of P 6,500,000.
Exclusive Communal Total
Family Home, communal P 13,000,000P 13,000,000
Other Exclusive Properties P 7,600,000 7,600,000
Communal Properties 15,000,000 15,000,000
TOTAL P 7,600,000 P 28,000,000P 35,600,000
ORDINARY DEDUCTIONS:
Unpaid obligations ( 1,500,000) ( 1,500,000)
Losses on communal properties ( 400,000) ( 400,000)
Transfer for Public Use (exclusive) ( 780,000) ( 780,000)
ESTATE AFTER ORD. DED. P 6,820,000 P 26,100,000P 32,920,000
SPECIAL DEDUCTIONS:
Standard Deduction ( 5,000,000)
Family Home (only half of the amount) ( 6,500,000)
SHARE OF THE SPOUSE (26,100,000 / 2) ( 13,050,000)
NET TAXABLE ESTATE P 8,370,000