MODULE 5

DEDUCTIONS FROM GROSS ESTATE

PRINCIPLES IN DEDUCTIONS AGAINST GROSS ESTATE:

 As a general rule, deductions from gross estate are presumed to be COMMON unless identified as exclusive.
 As a general rule. MATCHING PRINCIPLE applies in the sense that deductions must pertain to properties which are declared as forming part of the Gross
Estate.
 Deductions may either be: ORDINARY OR SPECIAL DEDUCTIONS.

(A) ORDINARY DEDUCTIONS

Note that upon the effectivity of TRAIN LAW, (1) funeral, (2) judicial, and (3) medical expenses are NOT DEDUCTIBLE AGAINST GROSS ESTATE.

Example: In 2018, Mr. Ramos’ heirs, in the settlement of his estate, claimed P10,000 deductions against his gross estate for expenses incurred in his funeral. The
BIR disallowed these expenses. Is the BIR correct?

ANS: Yes. The effectivity date of TRAIN Law is on January 1, 2018. As we have noted, funeral, judicial, and medical expenses, are no longer deductible against
gross estate upon effectivity of the TRAIN Law. Hence, the BIR is correct in disallowing the expenses claimed by the heirs.

(1) CASUALTY LOSSES

REQUISITES FOR DEDUCTIBILITY:

(a) A casualty loss – must arise from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement
(b) Incurred during the settlement of the estate, that is, within 1 year from the date of death
(c) Not compensated by insurance
(d) Not simultaneously claimed as deduction for income tax purposes.

AMOUNT DEDUCTIBLE: The value of the property lost

Example: Mr. A died in a fatal car accident on February 29, 2024. The following losses were identified:

Fair value loss incurred on his investments NON-DEDUCTIBLE – as it is not a casualty loss
Value of his BLUE car totally destroyed on February 2, 2026 NON-DEDUCTIBLE – as it is not within the settlement of the estate (i.e. not
within one year from the date of death)
Value of his RED car totally destroyed on February 2, 2025 DEDUCTIBLE – as it is incurred within the settlement of the estate (i.e.within
one year from the date of death)
VALUE of his insured PINK car destroyed on February 2, 2025 NON-DEDUCTIBLE – as it is subject to an insurance contract. The loss is
compensated by insurance.
Loss on robbery, the same is claimed in the income tax return NON-DEDUCTIBLE – as the loss is already claimed in the income tax return

(2) CLAIMS AGAINST INSOLVENT PERSONS

REQUISITES FOR DEDUCTIBILITY:

(a) The receivable/ claim against insolvent persons should be included in the gross estate
(b) The claim must be valid and outstanding as of the date of death
(c) The insolvency of the debtor must be established

AMOUNT DEDUCTIBLE: The amount which cannot be recovered from the insolvent person/s.

Example: Mr. B died with a receivable from Mr. C amounting to P25,000. Mr. C was adjudged by the court as insolvent as his assets cannot pay the claims of his
creditors. Upon checking, P12,000 of Mr. B’s receivable is collectible. How much then is the deduction for claims against insolvent person?

ANS: First things first, the P25,000 receivable of Mr. B should be presented as part of his gross estate. Now, the deduction for claims against insolvent person refers
to the amount which cannot be recovered from insolvent persons. Hence, P13,000 (being P25,000 total receivable less P12,000 collectible) is the answer.

(3) CLAIMS AGAINST THE ESTATE

REQUISITES FOR DEDUCTIBILITY:

(a) must arise from TORTS, CONTRACTS, or OPERATION OF LAW

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(b) A personal obligation(liability) of the decedent existing at the time of death

(c) Must be contracted in good faith
(d) Must be a valid obligation in the sense that the same is not yet condoned by the creditors nor prescribed.

AMOUNT DEDUCTIBLE: The amount due against the estate (not condoned nor prescribed).

Example 1: Mr. D has a loan payable to Mr. E amounting 10,000. Mr. E knowing that Mr. D is battling a serious illness, thereby condoning P8,000 of his claims. A day
after, Mr. D died. How much can the estate of D claim as a deduction (under claims against the estate) from this payable?

ANS: Only P2,000 may be claimed as a deduction under claims against the estate since it is the amount which is not condoned nor prescribed as of the time of death.
Note that the forgiveness/condonation of Mr. D’s payable occurred before he died.

Example 2: Ms. D has a loan payable to Mr. E amounting 10,000. Mr. E knowing that Mr. D has died from a disease, condoned one-half of the latter’s payable. How
much can the estate of D claim as a deduction (under claims against the estate) from this payable?

ANS: Still, P10,000 may be claimed as a deduction under claims against the estate since it is the amount which is not condoned nor prescribed as of the time of death.
Note that the forgiveness/condonation of Mr. D’s payable occurred after he died. Deductions for claims against the estate shall only pertain to those which are existing
as of the time of death (and not after it).

SUBSTANTIATION REQUIREMENTS:

All unpaid obligations and liabilities of the decedent at the time of his death are allowed as deductions from gross estate. Provided, however, that the following
requirements/documents are complied with/submitted:

(A) In case of simple loan (including advances):

(1) General Rule: The debt instrument must be duly notarized at the time the indebtedness was incurred, such as promissory note or contract of loan.
Exception: for loans granted by financial institutions where notarization is not part of the business practice/policy of the financial institution-lender.

(2) Duly notarized certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death.
If the creditor is:
(a) Corporation - the sworn certification should be signed by the President, or Vice President, or other principal officer of the corporation.
(b) Partnership - the sworn certification should be signed by any of the general partners.
(c) Bank or other financial institutions - the certification shall be executed by the branch manager of the bank/financial institution which monitors and manages the loan
of the decedent-debtor.
(d) Individual - the sworn certification should be signed by him.

(3) In accordance with the requirements as prescribed in existing or prevailing internal revenue issuances, proof of financial capacity of the creditor to lend the
amount at the time the loan was granted, as well as its latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance
of the decedent-debtor.

(4) A statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was
contracted within three (3) years prior to the death of the decedent;

(B) If the unpaid obligation arose from purchase of goods or services: Pertinent documents evidencing the purchase of goods or service, such as sales
invoice/delivery receipt (for sale of goods), or contract for the services agreed to be rendered (for sale of service), as duly acknowledged, executed and signed by
decedent debtor and creditor, and statement of account given by the creditor as duly received by the decedent debtor;

(C) Where the settlement is made through the Court in a testate or intestate proceeding, pertinent documents filed with the Court evidencing the claims against
the estate, and the Court Order approving the said claims, if already issued, in addition to the documents mentioned in the preceding paragraphs.

*Accommodation Loan: generally presented as a receivable in gross estate and a deduction in the estate tax return of the decedent.

However, when there is legal impediment to recognize the same, the treatment should be that the loan be NOT included in BOTH the gross estate and allowable
deductions against gross estate.

(4) UNPAID MORTGAGE

REQUISITES FOR DEDUCTIBILITY:

(a) The fair market value of the mortgaged property (gross of any amount of indebtedness) should be included of the gross estate.
(b) Contracted in good faith for adequate and full consideration
(c) Unpaid as of the date of death
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AMOUNT DEDUCTIBLE: Amount of the unpaid mortgage over the property

Example: 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 P900,000

Less:
Amount paid before death (P200,000)
Amount paid after death (P400,000)
Present balance of the mortgage payable P300,000

Compute for the unpaid mortgage deduction:

ANS: First things first, the gross amount of P1,500,000 value of the property must be reported in the gross estate. Now, unpaid mortgage deduction refers to the
amount of mortgage which is unpaid as of the date of death. Hence, any payment made after the date of death shall be ignored for this purpose because they are not
existing as of the date of death. Thus, the answer would be P700,000 ( being P900,000 original mortgage amount less P200,000 payment made before his death).

(5) UNPAID TAXES

REQUISITE FOR DEDUCTIBILITY: Must be unpaid and accrued BEFORE THE DEATH of the decedent.

AMOUNT DEDUCTIBLE: Amount of unpaid taxes accrued as of the date of death

Example: Which of the following is not deductible from the gross estate of a decedent? (Adapted from Tabag’s CPA Reviewer in Taxation, 2023 edition)
I. Income taxes on income received after death
II. Property taxes not accrued before death
III. Estate Tax
a. I and II only
b. II and III only
c. All of the above
d. None of the above

Answer: C. Here are the reasons:

Income taxes on income received after death NOT DEDUCTIBLE – since the income to which they relate is not earned on or
before the date of death
Property taxes not accrued before death NOT DEDUCTIBLE – since the tax is not accrued before the date of death

Estate tax NOT DEDUCTIBLE – since it is a tax which is to be made one year AFTER
death hence this is not accrued as of the date of death

(6) TRANSFER FOR PUBLIC USE (TPU)

REQUISITES:
(a) The recipient must be the Government of the Philippines, or any of its political subdivisions (national or local)
(b) The purpose must be for PUBLIC USE
(c) Must be testamentary in nature – included in the Last Will and Testament
(d) Property must be included in the gross estate
(e) Generally deducted against exclusive properties

AMOUNT DEDUCTIBLE: The value/cost of the property donated to the government

(7) VANISHING DEDUCTIONS FOR PROPERTY PREVIOUSLY TAXED

REQUISITES FOR DEDUCTIBILITY:

(a) Property be located in the Philippines
(b) Property must be included in the gross estate of the decedent
(c) The decedent DIED within 5 years from the GRATUITOUS acquisition of the property from a previous donor or decedent
(d) The property must have formed part of the taxable estate of the prior decedent or the taxable gift of the donor and the transfer tax relative thereto had been paid
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(e) No vanishing deduction on the property was allowed in the prior estate
(f) The property is identified as one received from the gratuitous transfer

COMPUTATION OF THE ALLOWABLE VANISHING DEDUCTION:

The amount which is the LOWER between: XXX

(A) Fair Value at the time of death; or
(B) Fair Value at the time of previous gratuitous transfer (inheritance
or donation)
Less: Amount of mortgage ASSUMED AND PAID BY THE (XXX)
CURRENT DECEDENT
Initial Basis (IB) PXX
Less: PRORATED OTHER ORDINARY DEDUCTIONS XX
(Initial Basis/Gross Estate) x (Losses + Indebtedness + Taxes + TPU)
Final Basis PXX
Rate of Vanishing Deduction *X%
VANISHING DEDUCTION PXX

*RATE OF VANISHING DEDUCTION:

TEST: RATE
[LENGTH OF TIME FROM THE GRATUITOUS TRANSFER TO
THE DECEDENT’S DATE OF DEATH]
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%
More than 5 years 0% - NO DEDUCTION ALLOWED

Example: Mr. Y. single, died leaving properties he inherited 2 and ½ years ago with a current fair market value of P 800,000 (as of the date of death). The property
was inherited when it was worth P1,000,0000 and had a P850,000 unpaid mortgage. Mr. Y paid P550,000 until his death. Other properties of Mr. Y had a fair market
value of P1,200,000 at the time of his death. The losses, taxes, and transfer for public purpose amounted to P140,000. (Adapted from Banggawan’s Business and Transfer Tax
Book, 2019 edition)

Compute for the allowable vanishing deduction:

STEP 1: P800,000
The amount which is the LOWER between:
(A) Fair Value at the time of death = (P800,000); or
(B) Fair Value at the time of previous gratuitous transfer (inheritance or donation) = P1,000,000
STEP 2: (P550,000)
Less: Amount of mortgage ASSUMED AND PAID BY THE CURRENT DECEDENT (that is, the
amount of mortgage paid by the decedent until his death was P550,000)
STEP 3: P250,000
Initial Basis (IB) which is the answer in step 1 minus answer in step 2

STEP 4: (55,000)
Less: PRORATED OTHER ORDINARY DEDUCTIONS
((IB/GE) x (Losses + Indebtedness + Taxes + TPU)

 The initial basis is P250,000 (as computed above).

 Gross estate is P2,000,000 (being P800,000 value of the inherited property plus P1,200,000
other properties at fair value)
 Losses, taxes and transfer for public use is P140,000
 Indebtedness amounts to P300,000 (being P850,000 the original unpaid mortgage minus
P550,000 paid by the decedent until his death)

Hence, ((P250,000/P2,000,000) x (P140,000 + 300,000)) equals to P55,000.

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STEP 5: P195,000
Final Basis is the difference between the initial basis (step 3) and the prorated other deductions
(step 4).
STEP 6: 60%
Rate of Vanishing Deduction: In this case, we will use 60% since the property was inherited 2.5
years from the death of the decedent. Using the table for vanishing deduction rates, we can notice
that it is within the row of ‘more than 2 years but not more than 3 years’.
STEP 7: P117,000
Amount of allowable vanishing deduction by simply multiplying the final basis (step 5) by the rate
of vanishing deduction (step 6)

Hence, after a tedious and procedural approach in solving this problem, the answer would be P117,000.

(B) SHARE OF THE SURVIVING SPOUSE IN THE NET COMMON/CONJUGAL PROPERTIES

REQUISITES FOR DEDUCTIBILITY:

(a) A deduction applicable only to married decedents
(b) Technically computed as one-half of the net common properties before special deductions

AMOUNT DEDUCTIBLE:

Amount of Common Properties XXX

Amount of Ordinary Deductions against Common Properties (XXX)
Net Common Properties before Special Deductions XXX
Multiplied by: 50% or ½
Allowable Deduction – Share of the Surviving Spouse XXX

(C) SPECIAL DEDUCTIONS

(1) FAMILY HOME

Concept: It is the dwelling house, including the land on which it is situated, where the husband and wife, or head of the family, and members of the family reside.

Note that family home may be constituted by married individuals or even unmarried head of the family. For this purpose, a person may only constitute ONE FAMILY
HOME.

REQUISITES FOR DEDUCTIBILITY:

(a) The decedent is married or head of a family
(b) The family home is located in the Philippines
(c) The value of the family home is included in the gross estate
(d) Only applicable to residents and citizens (thus, not available for Non-resident aliens)

AMOUNT DEDUCTIBLE: The amount which is LOWER between the ACTUAL INTEREST and P10 million pesos (P10,000,000):

CLASSIFICATION OF FAMILY HOME: ACTUAL INTEREST

(a) PURELY EXCLUSIVE 100% of the Fair Market Value of the Family Home
(b) PURELY COMMON 50% of the Fair Market Value of the Family Home
(c) MIXED 100% of the Fair Market Value of the Exclusive Portion of the Family Home PLUS
50% of the Fair Market Value of the Common Portion of the Family Home

Example 1: Mr. Word died leaving his house worth P11 million and lot P4 million. Assuming that the house and lot are purely exclusive, compute the deduction for
family home.

ANS: The lower amount of P10 million statutory threshold vs. P15 million actual interest (see below) is P10 million.
(a) PURELY EXCLUSIVE 100% of the Fair Market Value of the Family Home P15 million
(P11 million plus P4 million)

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Example 2: Mr. Word died leaving his house worth P11 million and lot P4 million. Assuming that the house and lot are purely common, compute the deduction for
family home.

ANS: The lower amount of P10 million statutory threshold vs. P7.5 million actual interest (see below) is P7.5 million.
(b) PURELY COMMON 50% of the Fair Market Value of the Family Home P7.5 million
50% of (P11 million plus P4 million)

Example 3: Mr. Word died leaving his house worth P11 million and lot P4 million. Assuming that the house is an exclusive property and the lot is a common property,
compute the deduction for family home.

ANS: The lower amount of P10 million statutory threshold vs. P13 million actual interest (see below) is P10 million.
(c) MIXED 100% of the Fair Market Value of the Exclusive Portion of P13 million
the Family Home PLUS
50% of the Fair Market Value of the Common Portion of
the Family Home

(100% of P11 million) + (50% of P4 million)

(2) STANDARD DEDUCTION: a statutory deduction allowed by law without need of substantiation

DECEDENT ALLOWABLE STANDARD DEDUCTION

RESIDENT OR CITIZENS P5,000,000 (5 MILLION PESOS)
NON-RESIDENT ALIENS P500,000 (5 HUNDRED THOUSAND PESOS)

(3) REPUBLIC ACT 4917

REQUISITES FOR DEDUCTIBILITY:

(a) The amounts received by the heirs upon the death of the decedent-employee should be in accordance with the provisions of RA 4917

(b) The amounts received under RA 4917 should be included 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.