Sell Real Property Below Zonal Value? Why the BIR May Treat the Difference as a Taxable Gift

Selling real property below its BIR zonal value does not automatically trigger donor’s tax the way many sellers assume — NIRC Section 100’s “deemed gift” rule for inadequate consideration expressly excludes capital-asset real property already covered by the 6% capital gains tax. But that carve-out is narrower than it sounds: it doesn’t apply to ordinary-asset property or shares, and a family sale priced well below zonal value can still draw BIR scrutiny as a disguised donation under general principles, even when Section 100 itself is off the table.

What does NIRC Section 100 actually say about underpriced sales? #

NIRC Section 100, as amended by the TRAIN Law (Republic Act No. 10963), treats the gap between a property’s fair market value and a below-market selling price as a taxable gift — but only for property outside a specific carve-out. The provision reads, in full:

“Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.” — NIRC Section 100, as amended by RA 10963 (TRAIN Law)

Read literally, this rule can hit almost any underpriced transfer: shares of stock, personal property, receivables, or an ordinary-asset business property sold for less than it’s worth. The opening clause — “other than real property referred to in Section 24(D)” — is the part sellers most often miss, and it changes the analysis specifically for capital-asset real property.

Why capital-asset real property is different: the Section 24(D) carve-out #

Section 24(D) covers the sale, exchange, or disposition of real property classified as a capital asset, taxed at a flat 6% capital gains tax on whichever is highest among the selling price, BIR zonal value, and the local assessor’s fair market value. Because Section 100 expressly excludes this category of property from its deemed-gift formula, a capital-asset lot sold below zonal value is generally not automatically hit with a second, separate donor’s tax assessment computed on the shortfall — the way it would be if the same shortfall arose on a sale of shares or an ordinary-asset property.

The likely reason for the carve-out is straightforward: capital gains tax on real property already ignores the contract price whenever it’s lower than zonal value or assessed fair market value, using the higher figure as the tax base under NIRC Section 6(E) regardless of what the deed states. A seller who names ₱1,000,000 on a deed for a lot with a ₱3,000,000 zonal value still owes 6% capital gains tax on ₱3,000,000 — see BIR Zonal Value: How It Sets the Minimum Tax Base for how that “higher of” rule works. Since the treasury’s exposure to underpricing is already closed off through the CGT base rule, stacking a Section 100 deemed-gift assessment on top would tax the same shortfall twice under two different theories — which is likely why Congress carved this specific asset class out of Section 100 from the start.

This carve-out only applies to real property that is actually a capital asset. Whether a given parcel qualifies turns on who owns it and how it’s used — see Capital Asset vs Ordinary Asset: How the BIR Classifies Real Property Under RR No. 7-2003 for the full test. Real property held by a real estate dealer, developer, or used in a trade or business is an ordinary asset, and ordinary-asset property is not “real property referred to in Section 24(D)” — it falls back under Section 100’s general deemed-gift rule if sold for less than fair market value.

The bona fide, arm’s-length safe harbor #

The TRAIN Law also added a proviso to Section 100: a transfer made in the ordinary course of business — one that is bona fide, at arm’s length, and free from any donative intent — is treated as made for adequate and full consideration even if the price sits below fair market value, so it falls outside the deemed-gift rule entirely. This safe harbor is discussed most often in the context of unlisted shares sold below their fair market value (Revenue Regulations No. 12-2018 and Revenue Memorandum Circular No. 30-2019 apply it to that scenario specifically), but its underlying test — genuine business purpose, real negotiation between unrelated or economically adverse parties, and no intent to benefit the buyer gratuitously — is the same standard the BIR and the courts look to whenever a transaction’s price is questioned.

In practice, the safe harbor is hardest to invoke exactly where sellers most want it: a sale between family members. A parent-to-child or sibling-to-sibling transaction is not automatically disqualified, but the close relationship is itself evidence cutting against “arm’s length,” and the taxpayer bears the burden of showing the discount reflects a genuine business reason (an urgent need for cash, a documented market defect in the property, a bulk or distressed-sale discount also offered to unrelated buyers) rather than an intent to pass value to a relative at a reduced tax cost.

Worked example 1: a family sale of a capital-asset lot #

A parent sells a residential lot classified as a capital asset — never used in any business — to their adult child for ₱1,000,000, when the BIR zonal value for that street is ₱3,000,000. No appraisal, competing offer, or documented financial hardship supports the discount; the parent simply wants to help the child acquire the property affordably.

Capital gains tax is unaffected by the underpriced deed — it’s computed on the ₱3,000,000 zonal value either way, exactly as it would be if the parent had sold at full price. Because this is Section 24(D) real property, Section 100’s deemed-gift formula does not mechanically apply to the ₱2,000,000 gap between the zonal value and the price actually paid.

That is not the end of the analysis, though. The parent-child relationship, the size of the discount, and the absence of any arm’s-length negotiation are exactly the facts that undermine the TRAIN Law safe harbor described above. If the BIR examines this transaction and concludes it was, in substance, a gift of ₱2,000,000 in value dressed as a sale, it can pursue donor’s tax on that shortfall under the BIR’s general authority over donations (NIRC Sections 98–99) — a separate legal theory from Section 100’s specific deemed-gift mechanism, but one that reaches the same economic outcome when the facts support it. A prudent filer in this position documents the actual reason for the discounted price and, if none exists beyond family generosity, treats the difference as a gift up front and files BIR Form 1800 rather than waiting for an assessment.

Worked example 2: a genuine arm’s-length ordinary-asset sale #

A distributor holds a small warehouse lot as inventory-type ordinary asset property (it operates as a real estate lessor on the side) and sells it to an unrelated logistics company at ₱4,200,000, roughly 12% below the ₱4,800,000 fair market value, after the buyer’s engineer flagged a documented drainage defect during due diligence. Both parties are unrelated, represented separately, and the discount is tied to a specific, verifiable defect rather than any intent to benefit the buyer.

Because this property is an ordinary asset, it is not “real property referred to in Section 24(D)” and does not get that automatic carve-out — Section 100’s deemed-gift rule is the one that would normally apply to the ₱600,000 shortfall. But the TRAIN Law proviso saves this transaction: unrelated parties, a documented commercial reason for the discount, and no donative intent are exactly the facts the safe harbor was written for. The seller instead reports the sale as ordinary business income subject to creditable withholding tax, consistent with the ordinary-asset rules in Capital Asset vs Ordinary Asset: How the BIR Classifies Real Property.

Comparing the two theories the BIR can use #

What to check before pricing a sale below fair market value #

• Confirm the asset classification first. A capital-asset lot’s CGT base already floors at zonal value regardless of price, per BIR Zonal Value; an ordinary asset does not get that automatic floor and routes through Section 100 instead if underpriced.
• Document the commercial reason for any discount — an appraisal, a competing (lower) offer, a defect report, or a hardship sale — especially between related parties, since relationship alone weakens the arm’s-length safe harbor.
• Don’t assume “it’s a sale, not a donation” settles the question. The BIR looks at substance: real negotiation, adequate consideration actually paid, and the absence of donative intent, not just the label on the deed.
• If the discount is genuinely a gift, file it as one. Filing BIR Form 1800 on the shortfall, or structuring the transfer as an outright donation from the start (see How to Pay Donor’s Tax and Get an eCAR When Donating Real Property), is cheaper in penalties than a later deficiency assessment plus surcharge and interest.

Frequently asked questions #

Does selling real property below zonal value always trigger donor’s tax? #

No. NIRC Section 100’s deemed-gift rule, which treats an underpriced sale’s shortfall as a taxable gift, expressly excludes real property covered by Section 24(D) — the capital-asset real property already subject to the 6% capital gains tax on the higher of selling price, zonal value, or assessed fair market value. Selling a capital-asset lot below zonal value generally just means capital gains tax is computed on the higher zonal value instead of the lower contract price, not that donor’s tax automatically applies on top of it.

What is the difference between capital gains tax and donor’s tax on an underpriced sale? #

Capital gains tax is a flat 6% on the higher of the selling price, BIR zonal value, or assessed fair market value of real property classified as a capital asset — it applies regardless of the actual price named in the deed. Donor’s tax under NIRC Section 100 is a separate 6% tax on the value of a gift, triggered when property (other than Section 24(D) capital-asset real property) changes hands for less than adequate consideration, or when a transaction is in substance a gratuitous transfer rather than a genuine sale.

Why does NIRC Section 100 exclude real property from the deemed-gift rule? #

Section 100 opens with the phrase “other than real property referred to in Section 24(D)” before describing the deemed-gift rule, carving that category out entirely. The likely rationale is that capital gains tax on real property already uses the higher of selling price, zonal value, or assessed fair market value as its base, regardless of what the parties actually agreed to pay — so underpricing a capital-asset real property sale on paper does not shrink the government’s tax take the way underpricing shares or other property would, making a second deemed-gift layer unnecessary for that specific asset class.

What is the bona fide, arm’s-length safe harbor added by the TRAIN Law? #

The TRAIN Law (Republic Act No. 10963) added a proviso to Section 100 stating that a transfer made in the ordinary course of business — one that is bona fide, at arm’s length, and free from any donative intent — is treated as made for adequate and full consideration even if the price is below fair market value, so it falls outside the deemed-gift rule. This safe harbor is most often invoked for sales of unlisted shares below fair market value, and BIR guidance under Revenue Regulations No. 12-2018 requires the taxpayer to show the transaction genuinely meets all three conditions, not merely assert them.

Can the BIR still assess donor’s tax on a family sale of real property even if Section 100 doesn’t apply? #

Yes, on a different legal footing. Section 100’s mechanical deemed-gift formula for inadequate consideration does not reach Section 24(D) capital-asset real property, but the BIR retains authority to examine whether a transaction styled as a “sale” is, in substance, wholly or partly gratuitous — for example, a lot sold to a child at a steep discount from zonal value with no genuine price negotiation. If the facts show donative intent and no arm’s-length bargaining, the BIR can pursue donor’s tax on general donation principles under NIRC Sections 98 and 99, independent of Section 100’s specific deemed-gift mechanism.

Summary #

NIRC Section 100’s deemed-gift rule for inadequate consideration expressly excludes capital-asset real property covered by Section 24(D), because capital gains tax already taxes that property on the higher of selling price, zonal value, or assessed fair market value regardless of the price stated in the deed. That carve-out does not extend to ordinary-asset real property or other property like shares, which fall under Section 100 unless the TRAIN Law’s bona fide, arm’s-length, no-donative-intent safe harbor is met — and it does not immunize a family sale from separate donor’s tax scrutiny if the BIR finds the transaction was, in substance, a gift. Before pricing any sale below fair market value, confirm the asset’s classification with Capital Asset vs Ordinary Asset, check the applicable zonal value against BIR Zonal Value: How It Sets the Minimum Tax Base, and document the commercial reason for any discount before, not after, the BIR asks.