PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTION)
- Purpose – 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 subject to vanishing deduction can be identified as the one received from the prior decedent, or from the donor, or can be identified as having been acquired in exchange for the property so received;
- The property acquired formed part of the gross estate of the prior decedent, or of the taxable gift of the donor;
- The estate tax on the prior transfer or the gift tax on the gift must have been paid; and
- The estate of the prior decedent has not previously availed of the vanishing deduction.
- Percentage of vanishing deduction – the rate depends on the interval between the death of present decedent and death of prior decedent (if the property was acquired by inheritance) or death of present decedent and date of gift (if the property was acquired by donation), as follows:
|More than||Not more than||Percentage|
|1 years||2 years||80%|
|2 years||3 years||60%|
|3 years||4 years||40%|
|4 years||5 years||20%|
Procedures for Computing Vanishing Deductions:
- Determine the initial value by comparing the FMV of the property used in computing the first transfer tax paid with the FMV of the property in the present decedent. The lower of the two is the initial value.
- From the initial value taken, deduct any mortgage or lien on the property previously taxed which was paid by the present decedent prior to his death, where such mortgage or lien was a deduction from the gross estate of the prior decedent or gross gift of the donor. This is the initial basis.
3. The initial value taken, as reduced by Step (b), shall be further reduced by prorated deductions for expenses, losses, indebtedness, taxes (ELIT) and transfers for public purpose (PP) only, allocable to the property previously taxed as follows:
Initial basis / Gross Estate x Deductions = Portion Deductible
This is the final basis.
4. Determine the time interval between the death of present decedent and death of prior decedent (if the property was acquired by inheritance) or death of present decedent and date of gift (if the property was acquired by donation) to find the applicable percentage of vanishing deduction.
5. Multiply the final basis by the percentage of vanishing deduction to arrive at the VANISHING DEDUCTION.
Question to Answer:
- A citizen and resident of the Philippines, married, died, leaving the following properties.
|Real and personal properties acquired during the marriage||P3,000,000|
|Land and building inherited from the father 1½ years ago (with a fair market value at that time of P1,500,000), and used at the time of his death as home for his family||
|Car, purchased with cash received as gift from the mother during the year||500,000|
|Cash (including P500,000 received by inheritance from the father)||1,500,000|
|Claims against conjugal properties||600,000|
|Unpaid mortgage on the land and building inherited (from an original of P600,000 when inherited)||
The vanishing deduction is:
|a. P1,530,000||b. P1,080,000||c. P450,000||d. P1,130,000|
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JONATHAN RUIZ CPA, MIB