Basis of Property for Gain or Loss: NIRC Section 40(B) Rules for Purchased, Inherited, and Gifted Assets
Under NIRC Section 40(B), your basis in property depends on how you acquired it: cost if purchased, fair market value on the date of acquisition if inherited, and the donor’s basis if received as a gift. Gain is the amount realized minus basis, and loss is basis minus the amount realized. Gifted property has a special loss rule that can use a lower fair-market-value basis.
Handle Your BIR Filings in One Place FREE →How does Section 40 compute gain or loss? #
Section 40(A) defines gain as the excess of the amount realized over the basis or adjusted basis, and loss as the excess of the basis over the amount realized. The amount realized is “the sum of money received plus the fair market value of the property (other than money) received.” Section 40(B) then lists the basis rules by mode of acquisition:
“(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - The basis of property shall be - (1) The cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired by purchase; or (2) The fair market price or value as of the date of acquisition, if the same was acquired by inheritance; or (3) If the property was acquired by gift, the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is greater than the fair market value of the property at the time of the gift then, for the purpose of determining loss, the basis shall be such fair market value; or (4) If the property was acquired for less than an adequate consideration in money or money’s worth, the basis of such property is the amount paid by the transferee for the property; …”
— Section 40(B)(1)–(4), National Internal Revenue Code (Republic Act No. 8424), as posted by LawPhil.
What is the basis for each way of acquiring property? #
| How acquired | Basis for gain or loss | Section |
|---|---|---|
| Purchase | Cost | 40(B)(1) |
| Inheritance | Fair market value on the date of acquisition | 40(B)(2) |
| Gift | Donor’s (or last non-gift owner’s) basis; for loss, the lower fair market value at the time of the gift if donor’s basis is higher | 40(B)(3) |
| Acquired for less than adequate consideration | Amount the transferee paid | 40(B)(4) |
Worked example: a gifted vehicle sold three ways #
Carla receives a used delivery van as a gift. The donor’s cost basis was ₱900,000, and the van’s fair market value at the time of the gift was ₱600,000. Because the donor’s basis (₱900,000) exceeds fair market value (₱600,000), two bases apply: ₱900,000 for gain and ₱600,000 for loss. All figures are fictional.
| Carla sells the van for | Test for gain (basis ₱900,000) | Test for loss (basis ₱600,000) | Result |
|---|---|---|---|
| ₱1,000,000 | ₱1,000,000 − ₱900,000 = gain of ₱100,000 | No loss | Gain ₱100,000 |
| ₱700,000 | Below ₱900,000, so no gain | Above ₱600,000, so no loss | Neither gain nor loss |
| ₱500,000 | No gain | ₱600,000 − ₱500,000 = loss of ₱100,000 | Loss ₱100,000 |
Using the donor’s ₱900,000 as the only basis would have reported a ₱400,000 loss on the third sale. The special loss basis in Section 40(B)(3) prevents that.
Worked example: an inherited asset #
Jun inherits a painting valued at ₱800,000 on the date of the decedent’s death and later sells it for ₱900,000. Under Section 40(B)(2), the basis is ₱800,000, so the gain is ₱100,000. The decedent’s original cost does not matter.
Where this rule applies and where it does not #
Section 40 sets the basis concept. The tax on a particular disposition may follow a separate regime: capital gains tax on real property is computed on a different base, as explained in Capital Gains Tax on Inherited Real Property, and the loss may be limited by NIRC Section 39 or barred by Section 36(B). Donations are also separately taxed; see Documentary Stamp Tax on Deed of Donation of Real Property.
Summary #
NIRC Section 40(B) sets basis by acquisition: cost for purchases, fair market value on acquisition for inheritances, the donor’s basis for gifts (with fair market value used for loss when it is lower), and the price actually paid for bargain transfers. Keep acquisition documents such as deeds, receipts, and valuations. The quoted text comes from RA 8424 as posted by LawPhil; verify against the current consolidated Code before applying it.
Frequently asked questions #
What is the tax basis of property I bought? #
Its cost. NIRC Section 40(B)(1) sets the basis of purchased property as the cost thereof, for property acquired on or after March 1, 1913.
What is the basis of property I inherited? #
The fair market price or value as of the date of acquisition. NIRC Section 40(B)(2) uses that value, not the decedent’s original cost.
What is the basis of a gift? #
Generally the donor’s basis, or that of the last preceding owner who did not acquire it by gift. If that basis is greater than fair market value at the time of the gift, NIRC Section 40(B)(3) uses fair market value as the basis for determining loss.
Can a sale of gifted property produce neither gain nor loss? #
Yes. When the donor’s basis exceeds fair market value at the gift date and the sale price falls between the two figures, the price is below the gain basis and above the loss basis, so no gain or loss is recognized.
What is the basis if I acquired property for less than a fair price? #
The amount you paid. NIRC Section 40(B)(4) sets the basis at the amount paid by the transferee when the property was acquired for less than an adequate consideration in money or money’s worth.