DEDUCTIONS FROM GROSS ESTATE

Chapter 5
Deductions
The value of thet estate of a citizen or resident alien of the Philippines shall
be determined by deducting from the value of the gross estate the following
items of deduction (RR12-2018 sec 6):
1. Standard deduction
2. Claims against the estate
3. Claims of the deceased against insolvent persons where the value of
the decedent's interest therein is included in the value of the gross estate.
4. Unpaid mortgages, taxes and casualty losses.
5. Property previously taxed
6. Transfer for public use
7. Family home
8. Amount received by heirs under Republic Act No. 4917
9. Net share of the surviving spouse in conjugal property
Deductions
The value of thet estate of a nonresident alien of the Philippines shall be
determined by deducting from the value of the gross estate the following items
of deduction (RR12-2018 sec 7):
1. Standard deduction
2. Claims against the estate
3. Claims of the deceased against insolvent persons where the value of
the decedent's interest therein is included in the value of the gross estate.
4. Unpaid mortgages, taxes and casualty losses.
5. Property previously taxed
6. Transfer for public use
7. Net share of the surviving spouse in conjugal property
Classification of Deductions
A. Ordinary Deductions
1. Claims against the estate
2. Claims against insolvent person
3. Unpaid mortgages, taxes and casualty losses
4. Transfer for public use*
5. Property previously taxed*
B. Special Deductions
1. Family home
2. Standard deductions
3. Benefits under RA 4917**
C. Share of the surviving spouse
LOSSES
There shall be deducted losses incurred during the
settlement of the estate arising from storms, shipwreck or other
casualties or from robbery, theft or embezzlement
• whens such losses are not compensated for by insurance or
otherwise,
• and if at the time of filing of the return such losses have not been
claimed as a deduction for income tax purposes in an income
tax return,
• and provided that such losses incurred not later than the last
day for payment of the estate tax.
Problem
Mr. Y died on a fatal crash on May 2, 2018. The following losses of properties were
identified by his estate administrator:
Losses up to the point of death
Value of car totally destroyed during the cash P 1,200,000
Pilferage loss on merchandise revealed by the
physical inventory count on April 30, 2018 80,000
Losses since the death of decedent
Fire loss on insured building on December 31, 2018 2,000,000
Theft of personal valuables of Mr. Y on January 1, 2019 180,000
Value of cash robbed from Mr. Y’s residence on February 14, 2019 620,000
Value of inventories loss on a shipwreck on December 15, 2018
to be claimed in the income tax return of the estate 400,000
Value of uninsured car destroyed during a storm on May 4, 2019 800,000
Unpaid loans receivable from a bankrupt customer 100,000
How much is the deductible loss?
Problem

The following losses of properties occured during the

settlement of estate of Mrs. Undoy:
Losses of separate properties or Mr. Undoy P60,000
Losses of common properties 40,000
Losses of separate properties or Mrs. Undoy 80,000

1. Compute the deductible losses from gross estate.

2. How much should be deducted in exclusive and common
properties respectively?
CLAIMS AGAINST INSOLVENT PERSON

• Claims against insolvent person is a form of loss but is

presented as a separate item of deduction in the tax
return.
• The deductible amount of claim against an insolvent
person is the unrecoverable amount of claim.
Problem

Mr. Kugar died with a total receivable of P200,000

from Mr. Kumag. The latter was adjudged bankrupt by the
court with only P800,000 total assets but with P2,000,000 in
total liabilities.
Solution:

Recoverable Amount:
P200,000 X (P800,000/P2,000,000) = P80,000

Receivable - P200,000
Recoverable - ( 80,000)
Loss - P120,000
CLAIMS AGAINST THE ESTATE
• The word “claims” is used in the statute is generally construed to
mean debts or demands of a pecuniary nature which could have
been enforced against the decease in his lifetime and could have
been reduced to simple money judgements.
• Claims against the estate or indebtedness in respect of property
may arise out of: (1) Contract; (2) Tort; or (3) Operation of Law.
Special rules on certain claims against the estate
1. Unpaid mortgage
This includes mortgage upon, or any indebtedness, in respect to
property where the value of the decedent's interest therein,
undiminished by such mortgage or indebtedness is included in gross
estate.
2. Unpaid taxes
Taxes which have accrued as of death of the decedent which were
unpaid as of time of death.
3. Accommodation loan
If the loan is found to be merely an accomodation loan where the loan
proceeds went to another person, the value of unpaid loan must be
included as a receivable of the estate.
Problem

A decedent had a family home worth P1,500,000 which was

encumbered by a mortgage. Details about the mortgage
were as follows:

Original amount P 900,000

Less: Paid before death 200,000
Paid after death 400,000
Current balance P 300,000
Problem

The heirs identified the following obligations of Mr. Natoy, a

bachelor, who died on September 1, 2018:
Personal loan condoned by the creditor P 400,000
Balance on the puchase price of a car,
paid by the heirs on September 28, 2018 200,000
Prescribed promissory note 100,000
Bank loan 300,000
Interest on bank loan, P30,000 50,000
accrued as of September 1, 2018

Compute for deductible “claim against the estate”

TRANSFER FOR PUBLIC USE
Transfer for public use includes 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 the exclusive public purposes. These must be indicated in the
decedent’s last will and testament.
Problem

Mr. A devised in his will the following properties.

Commercial land, to a public school P2,000,000
Land and building to a government owned
and controlled corporation (GOCC) 3,000,000
TOTAL P5,000,000
PROPERTY PREVIOUSLY TAXED

There are instances where properties are transferred

between persons in short periods of time causing a series
of transfer taxation.
Requisites of vanishing deduction
1. Present decedent must have died within five (5) years from the date of death
of the prior decedent or date of gift.
2. The property with respect to the deduction is claimed must have been part of
the gross estate situated in the Philippines of the prior decedent or taxable
gift of the donor.
3. The property must be identified as the same property received from prior
decedent or donor or the one received in exchange therefore.
4. The estate taxes on the transmission of the prior estate or the donors tax on
the gift must have been finally determined and paid.
5. No vanishing deduction on the property or the property given in exchange
therefore was allowed to the prior estate.
Procedural Computation: Vanishing Deduction

1. Determine the initial value

2. Determine the initial basis
Initial value xxx
Less: Indebtedness assumed and paid before death xxx
Initial basis xxx
3. Determine the final basis
Initial basis xxx
Less:
(initial basis/gross estate)x(losses, indebtedness,
taxes and transfer for public purpose) xxx
Final basis xxx
4. Determine the vanishing deduction
Procedural Computation

1. Determine the initial value

Initial value is the FMV of property at the date of the
first transfer or the FV at the date of death w/cever is lower.

2. Determine the initial basis

Initial basis is the initial value reduced by any
indebtedness on the property which was assumed and
paid by the present decedent before his or her death.
Procedural Computation

3. Determine the final basis

Final basis is the initial basis reduced by proportion of
other ordinary deductions (LIT + TPU) which the initial basis
bears over the gross estate of the decedent.

Initial basis xxx,xxx

Less: (Initial basis / Gross estate) x (LIT + TPU) xxx,xxx
Final basis xxx,xxx
Procedural Computation

4. Determine the vanishing deduction

If the decedent died within Vanishing percentage
1 year from receipt of the property 100%
2 years from receipt of the property 80%
3 years from receipt of the property 60%
4 years from receipt of the property 40%
5 years from receipt of the property 20%
More than five years 0%
Problem
Mr. H died with the following properties and allowable deductions:
Value upon
Value at death
inheritance
Car received as inheritance 3 years ago P 1,200,000 P 1,000,000
Other properties 9,000,000
Gross estate P10,000,000
Allowable ordinary deductions:
Losses P 300,000
Mortgage on car P 300,000 100,000
Indebtedness and taxes 1,300,000
Transfer for public use 300,000
Total ordinary deductions before PPT P 2,000,000
SPECIAL DEDUCTIONS

The following are considered special deductions

1.Family home
2.Standard deductions
3.Benefits under RA 4917
FAMILY HOME

Family home includes the dwelling house, including

the land on which it is situated, where the decedent and/or
members of his family reside as certified by the Barangay
Captain of the locality.
Requisites for deduction of family home

1.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 of the locality where the
family home is situated.
2.The value of the family home must be included as part of
the gross estate of the decedent;
3.The allowable deduction must not exceed the lowest of
fair market value of the family home as declared or
included in gross estate, the extent of the decedent’s
interest therein on P10,000,000
Problem

A decedent died leaving a family home with a FV of P11.7M

at the date of his death.

Compute the amount claimable as deduction for Family Home if:

1. The property is a common property
2. The property is exclusive of the decedent
3. The property is exclusive of decedent's spouse
Problem

Mr. T died leaving a family home consistng of a lot valued at

P4,000,000 and a house valued at P11,000,000.

Determine the amount to be included in the gross estate

and the deductible family home under each of the following
independent cases:
CASE 1 CASE 2 CASE 3
LOT Exclusive of Mr. T Common property Common property
HOUSE Common property Exclusive of Mrs. T Exclusive of Mr. T
STANDARD DEDUCTION

A deduction in the amount of P5,000,000 shall be

allowed as an additional deduction without the need of
substantiation. The full amount of P5,000,000 shall be
allowed as deduction for the benefit of the decedent.
BENEFITS UNDER R.A. 4917

Any amount received by the heirs from the decedent's

employer as a consequence of death of the decedent-
employee in accordance with RA 4917 is allowed as a
deduction provided that the amount of the separation
benefit is included as part of the gross estate of the
decedent.
SHARE OF THE SURVIVING SPOUSE

After deducting the allowable deductions appertaining

to the conjugal or community properties included in the
gross estate, the share of the surviving spouse must be
removed to ensure that only the decedent’s interest in the
estate is taxed.
The share of the surviving spouse is one-half of the
net conjugal or community properties of the spouses.
Problem

Mrs. Z died on July 1, 2018 leaving the following properties

upon her death:
Ranch P2,000,000
Orchard 3,000,000
Rest house 4,000,000
Commercial land 1,000,000
Family home 12,000,000
Other properties 4,000,000
Additional information:
1. Unpaid mortgage of rest house is amounting to P800,000
2. Half of the commercial land was donated to a charitable instution
and the other half was donated to a public school.
3. Ms. Mahirap, a debtor of the decedent, became insolvent having
a total assets of P300,000 and a total liabilities of P1,200,000. She
borrowed P400,000 from the decedent. Same amount was included
in the computation of the gross estate.
4. Some properties of Mrs. Z amounting to P600,000 has been
robbed six months after her death by ABG, a very famous akyat-
bahay gang in town.
Compute for net taxable estate:
Case 1: Assuming all properties are common properties.
Case 2: Assuming family home is exclusive property of the
decedent.
Case 3: Assuming family home is exclusive property of the
decedent's spouse.