Vanishing Deduction

PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTION)

  1. Purpose – to minimize the effects of a double tax on the same property within a short period of time.
  2. Conditions for allowance:
  3. There is a property forming a part of the gross estate of the present decedent situated in the Philippines;
  4. The present decedent acquired the property by inheritance or donation within 5 years prior to his death;
  5. 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;
  6. The property acquired formed part of the gross estate of the prior decedent, or of the taxable gift of the donor;
  7. The estate tax on the prior transfer or the gift tax on the gift must have been paid; and
  8. The estate of the prior decedent has not previously availed of the vanishing deduction.
  9. 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
xxx 1 years 100%
1 years 2 years 80%
2 years 3 years 60%
3 years 4 years 40%
4 years 5 years 20%
5 years xxx    xxx

 

Procedures for Computing Vanishing Deductions:

  1. 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.
  2. 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:

  1. 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  

 

2,000,000

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)  

100,000

The vanishing deduction is:

a. P1,530,000 b. P1,080,000 c. P450,000 d. P1,130,000

 

For the correct answers,  I would like to invite you to join my exclusive groups of aspiring CPAs for my upcoming project “CPA Dream Academy”.CPA DREAM ACADEMY

CPA Mentor,

JONATHAN RUIZ CPA, MIB

Advertisements

About PAM Academy Founder

Newbie Mentor and one of the influential author in the Philippines setting. His also the founder of PAM Academy and Developer of PAM PSE TRACKER application.
This entry was posted in Taxation and tagged , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s