DEDUCTIONS FROM GROSS ESTATE (ILLUSTRATIONS

LOSS, INDEBTEDNESS AND TAXES (LIT)

Illustration 1
Mr. Y died in a fatal car crash on November 2, 2019. The following losses of properties were identified
by his estate administrator:
Losses up to the point of death:
Value of car totally destroyed during the crash 1, 200, 000
Pilferage loss on merchandise revealed by the Physical inventory count on 80, 000
October 31, 2019

Losses since the death of the decedent:

Fire loss on an insurance building on December 25, 2019 2, 000, 000
Theft of personal valuables of Mr. Y on January 1, 2020 180, 000
Value of cash robbed from Mr. Y’s residence on Feb. 14, 2020 620, 000
Value of an insured car destroyed by a storm on March 1, 2021 800, 000
Unpaid loans receivable from a bankrupt customer 100, 000

The deductible loss shall be:

Loss on theft of personal valuables 180, 000
Loss on robbery 620,000
Total deductible loss 800,000

Illustration 2
Just before filing the return in June 15, 2020, the estate administrator noted the following losses in the
estate of Mr. Wong, a businessman who died June 30, 2019:
1. The $100, 000 in Mr. Wong’s savings account. He purchased these dollars at P54/$. The peso is
trading P53/$ on June 30, 2019 and 52/share on June 15, 2020
2. Mr. Wong had an office equipment with book value of 400, 000 on June 30, 2019. The executor
sold this for 350, 000 on March 10, 2020 to settle claims against the estate.
3. Mr. Wong’s vault containing 300, 000 inventories of precious metals was stolen on August 15,
2019. This was claimed as deduction in the income tax return of the estate for 2019.

None of the losses is deductible. The $100, 000 cash shall be included in gross estate at P53/$.
The decrease in value of the $100, 000 cash from P53/$ to P52/$ is not deductible since this is an
unrealized market loss. The loss in market value from P54/$ to P53/$ shall not be deducted
because the same is already deducted in the amount of gross estate. The office equipment had
realized loss of P50, 000 during the settlement of the state but this is not a casualty loss; hence,
non-deductible.

The 300, 000 theft loss is a realized casualty loss during the settlement of estate but the same is
claimed as an ordinary loss in the income tax return of the estate.
CLAIM AGAINST INSOLVENT PERSONS
Illustration 1
Mr. Kugar died with a total receivable of P200, 000 from Mr. Kumag. The latter was adjudged bankrupt by
the court with only P800, 000 total assets but with P2, 000,000 in total liabilities.
Mr. Kugar would be expected to recover only P200, 000/2,000,000 x P800,000 or P80,000 from Mr.
Kumag. The claim from insolvent person shall be P200,000 - 80,000 = 200,000.
Assuming that there is zero recovery, the entire amount of claim shall be presented as a deduction. Either
way, the 200, 000 claim must be included in gross estate.
Illustration 2
Mrs. Shelly died leaving a 500, 000 promissory note from Dye Company a bankrupt company undergoing
liquidation. The note was secured by a small piece of land with current value of 300, 000. The fiduciary of
Dye Company estimates a 40% recovery for unsecured creditors.
Mrs. Shelly also loaned Dye Company P20, 000 in a written instrument which prescribed a few years prior
to her death.
The claim against insolvent persons shall be computed as:
Recoverable amount 380,000
Less: Total claim 500,000
Claim against insolvent person 120,000

The recoverable amount is computed as:

Total claim 500, 000

Less: Fair value of collateral 300, 000 300, 000
Unsecured portion 200, 000
Multiply by: Recovery ratio 40% 80, 000
Recoverable amount 380, 000

Note: The 20, 000 waived loan which prescribed is not a claim against the insolvent person since it is no
longer an enforceable right at the point of death.
CLASSIFICATION OF LOSSES
Illustration
The estate of a Mrs. X, a married decedent under the regime of absolute community of property, suffered
the following losses:
1. 500, 000 cash from the family business were robbed from Mrs. X during the night of her murder.
2. A car with 800, 000 value which Mrs. X inherited during the marriage from his grandmother was
stolen at the time of her wake.
3. A few months after Mrs. X’ death, the 2, 000, 000 house which was inherited by Mr. X just
before their marriage was totally guttered by a fire
4. 300, 000 worth of personal belongings Mr. X were destroyed by the fire.
The foregoing shall be reported in the estate tax return of Mrs. X as follows:

Exclusive Communal Total

Robbery loss 500, 000 500, 000
Theft loss 800, 000 800, 000
Fire loss - house 2, 000, 000 2, 000, 000
Total 800, 000 2, 500, 000 3, 300, 000

Note: The 300, 000 fire loss on personal belongs of X is non-deductible since these are separate
properties of the surviving spouse and are not part of the gross estate. The house is communal property
since the same in inherited before the marriage.

Claim against the estate (Indebtedness)

Illustration 1
A decedent had a family home worth P1, 500, 000 which was encumbered by a mortgage. Details about
the mortgage were as follows:

Mortgage A
Original amount 900, 000
Less:
Paid before death 200, 000
Paid after death 400, 000
Present balance 300, 000

The Family home is a common property of the decedent and his spouse. The proceeds of the mortgage
were used for the family.
A deductible mortgage, just like other obligations, must have been incurred before death and remain
unpaid at the point of death. Hence, the allowable deduction for “Unpaid mortgage” shall be the balance
of the mortgage at the point of death:
 Mortgage A
Original amount 900, 000
Less:
Paid before death 200, 000
Balance at the date of death 700, 000

Presentation in the tax return:

Exclusive Common
Gross estate - 1, 500, 000
Deductions: -
Unpaid mortgage - 700, 000

Note:
1. The value of the property undiminished by the mortgage is included in the gross estate.
2. Only mortgages which were constituted during the lifetime of the decedent which remain unpaid
at the time of his death are deductible.

Illustration 2
During the marriage, Mr. Y inherited the commercial lot with a zonal value of 4, 000, 000. When one of
his children got sick, he mortgaged the property for P2,000, 000. He was able to pay 400, 000 until his
death.
Presentation in the tax return:

Exclusive Common
Gross estate 4,000, 000
Deductions:
Unpaid mortgage 1, 600, 000

Note: The mortgage shall be presented under common property because the proceeds of the same is use
for the benefit of the family.
Claims against the estate- unmarried decedent
Illustration 1
The heirs identified the following obligations of Mr. Natoy, a bachelor, who died on September 1, 2019:

Personal loan condoned by the creditor P400, 000

Balance on the purchase price of a car, paid by the heirs on September 28, 2019 200, 000
Prescribe promissory note 100, 000
Bank loan 300, 000
Interest on bank loan, 30, 000 accrued as of September 1, 2019 50, 000

The deductible “claims against the estate” shall be:

Unpaid balance on purchased car at point of death P200, 000

Bank loan 300, 000
Interest payable accruing as of the date of death 30, 000
Total deductible claims against the estate 530, 000

Presentation in the estate tax return:

Exclusive Common
Claims against the estate 530, 000
Illustration 2: Claims against the estate-married decedent
The executor of Mr. X compiled the following obligations:

Obligations of the exclusive properties of Mrs. X P 500, 000

Unpaid funeral expense 100, 000
Unpaid medical expense 200, 000
Obligations accruing after death 150, 000
Obligations of family before decendent's death 300, 000
Obligations of the separate properties of Mr. X 600, 000
Unpaid mortgage on family properties 1, 000, 000

The deductible “claims against the estate” shall be:

Obligations of family before decedent’s death 300, 000

Obligations of the separate properties of Mr. X 600, 000
Total deductible claims against the estate 900, 000

Presentation in the estate tax return:

Exclusive Common
Claims against the estate 600, 000 300, 000

Note:
1. Obligations are presumed common unless established as exclusive. Obligations of the surviving
spouse are not deductible because exclusive properties of the surviving spouse are not included in
the gross estate. (Matching rule)
2. Unpaid funeral expenses are non-deductible because they are debts accruing after death.
3. Unpaid medical expenses are likewise non-deductible even if they are incurred prior to death
because congress increased the standard deductions from P1M in the NIRC to P5M under the
train law in lieu of deductions for funeral, judicial and medical expenses.
4. Obligations accruing after death are obligations of the heirs and are not obligations of the
decedent. They are deductible against the share of the heirs in the hereditary estate and are not
deductible from the amount of the hereditary estate and are not deductible from the amount of the
hereditary estate. Hence, these are not deductible.
5. An unpaid mortgage is presented under a separate classification “Unpaid mortgage”.
TRANSFER FOR PUBLIC PURPOSE
Illustration
Mr. A devised in his will the following properties:
Commercial land, to a public school P2, 000, 000

Land and building, to a government-owned and controlled corporation (GOCC) 3, 000, 000
Total 5, 000, 000

The P5, 000, 000 must be included in gross estate. Only the P2, 000, 000 can be claimed as transfer for
public use. GOCCs are commercial and are not for public purposes.

VANISHING DEDUCTION
Illustration 1
Mr. A died on June 3, 2019 with the following properties in his gross estate:

Property Mode of acquisition Date of acquisition

Condo unit Purchase July 1, 2018
Car Donation July 3, 2016
Residence Purchase1 August 5, 2018
Commercial building Purchase2 June 1, 2019
Agricultural land Inheritance April 1, 2014

Note:
1. Using money inherited from his father who died on July 15, 2017
2. using money received by way of donation on December 25, 2011

Only properties received by way of the nation an inheritance within five years from the date of death can
be claimed with vanishing deduction.

Those acquired by way of purchase may qualify only if the money or property used in the purchase or
exchange came from the nation or inheritance received by the dissident within five years from his or her
death.

Note that the commercial building was purchased using donated money, but was received beyond five
years from June 3 2019. The agricultural land was also inherited beyond five years from June 3 2019.

Hence, only the car and the residence can be claimed with vanishing deductions.
Illustration 2
Within five years prior to the death of Mrs. Y, she received a house and lot's inheritance from her
grandparents. the house was uninsured and was totally destroyed by a fire before Mrs. Y’s death.

Mrs. Y also received a villa as inheritance from her father whose estate tax remained unpaid at the date of
Mrs. Y’s death . Mrs. Y also receive P100,000 cash donation from her mother. no donors tax was paid
under the nation because it is tax exempt.

The estate of Mrs. Y can claim vanishing deduction only for the lot. No vanishings deduction can be
claimed with respect to the house because it is no longer part of the gross estate having been destroyed
before Mrs. Y’s death.

No vanishing deduction is claimable for the Villa as the estate tax of the prior decedent is still unpaid. No
varnishing the duction is also claimable to the P100,000 cash as the same was not previously taxed.
There is no double taxation in this case.
Illustration 1 – Basic Procedures
Mr. H, a Bachelor, died with the following properties and allowable deductions:

Value upon inheritance Value at death

Car received as inheritance three years ago 1,200,000 1,000,000
Other properties 9,000,000
Gross estate 10,000,000

Allowable ordinary deductions

Mortgage on the car 500,000 300,000
Indebtedness and taxes 1,400,000
Transfer for public use 300,000
Total ordinary deductions before vanishing deductions 2,000,000

The vanishing deduction shall be determined as follows:

Initial value (lower of P1,200,000 and P1,000,000 P1,000,000
Less: mortgage assumed and paid (500,000-300,000) 200,000
Initial basis 800,000
Less: Proportional other ordinary deductions
Initial basis/Gross estate x other ordinary deductions 160,000
P800,000/P10,000,000 x P2,000,000)
Final basis 640,000
Multiply by: Vanishing percentage (3 years) 60%
Vanishing deduction P384,000

Tax return presentation

Exclusive Communal Total
Gross estate P10,000,000 P10,000,000
Less: ordinary deduction
Mortgage 300,000 300,000
Debts and taxes 1,400,000 1,400,000
Transfer for public use 300,000 300,000
Vanishing deduction 384,000 384,000
Illustration 2 – Integrative approach
Mrs. Z died on July 1, 2019 leaving the following properties upon her death:

Ranch received as inheritance from father on June 30, 2017 P2,000,000

orchard bought with money donated to Mr. and Mrs. Z buy a friend on 3,000,000
December 18, 2017
Rest house inherited by Mr. Z on March 21, 2016 4,000,000
Commercial land donated by his mother on January 2018 1,000,000
Family home from salaries of Mrs. X 2,000,000
Other properties from salaries of Mr. X 7,000,000

The estate of Mrs. Z claims the following deductions

Casualty losses on other properties 400,000

Claims against the estate, inclusive of P100,000 funeral expense 900,000
Unpaid mortgage on the ranch 600,000

additional information
➢ The ranch had a fair value of P2,400,000 in the gross estate of her father and is subject to 1,000,
000 mortgage at that time
➢ The orchard had a fair value of P2,500,000 on December 18,2017
➢ Mrs. Z mortgaged orchard on January 1, 2018 for P 1,500,000. P500,000 of the mortgage was
paid before her death.
➢ Mrs. Z designated in her will to donate the commercial land to a government agency for public
use.

Required: Determine the vanishing deduction.

The gross estate shall be computed first as follows:

Exclusive Communal Total

Ranch P2,000,000 P2,000,000
Orchard 3,000,000 3,000,000
Commercial land 1,000,000 1,000,000
Family home 2,000,000 2,000,000
Other properties 7,000,000 7,000,000
Gross estate 3,000,000 12,000,000 15,000,000

Note:
The rest house is an exclusive property of Mr. Z, the surviving spouse; hence, it is excluded in gross
estate.
The ordinary deduction shall also be computed as follows:
Exclusive Communal Total
Casualty losses P 400,000 P 400,000
Claims against the estate 800,000 800,000
Unpaid mortgage 600,000 600,000
Transfer for public purpose 1,000,000 1,000,000
Total ordinary deductions 1,600,000 1,200,000 2,800,000

Note:
1. Claim against the estate is P900,000 – P100,000 = P800,000
2. rest house is not part of the grass estate since it is a property of Mr. X, the surviving spouse;
hence not qualified to our vanishing deduction.
3. the commercial land shall be claimed through transfer for public use; hence not claimable again
as vanishing deduction.

The vanishing deduction for the ranch and the orchard shall be computed as follows:

Exclusive Communal Total

Initial value
- Ranch (lower of P2M & 2.4M) P2,000,000 P2,000,000
- Orchard (lower of 2.5M & 3M) P2,500,000 P2,500,000
Total P2,000,000 P2,500,000 P4,500,000
Less: Debts assumed and paid 400,000 0 100,000
Initial basis P1,600,000 2,500,000 4,400,000
Less: Pro-rated deduction
- Ranch: (1.6M/15M x P1.6M) 170,667 170,667
- Orchard (2.5M/15M x 1.2M) 200,000 200,000
Final basis 1,429,333 2,300,000 3,296,667
Multiply by: 60% 80%
Vanishing deduction 857,600 1,840,000 2,697,600

Note:
1. The mortgage on the orchard is a new indebtedness of Mrs. Z. It is not a passed-on pre-existing
debt. Deduction for mortgage or indebtedness payments pertains to mortgage or indebtedness on
the property assumed and paid for by the decedent.
2. The ranch is June 30, 2017 to July 1, 2019 or 2+ years; hence, up to 3 or 60%
3. The orchard is December 18, 2017 to July 1, 2019 or 1+ years; hence up to 2 or 80%.

Tax return presentation

Exclusive Communal Total
Gross estate P3,000,000 12,000,000 P15,000,000
Less: ordinary deduction
Casualty Losses 400,000 400,000
Mortgage 800,000 800,000
Debts and taxes 600,000 600,000
Transfer for public use 1,000,000 1,000,000
Vanishing deduction 857,600 1,840,000 2,697,600
FAMILY HOME

Illustration 1
A decedent died leaving a family home with a fair value of P17,000,000 at the date of his death.

The following shall be deductible for family home under each of the following independent cases:
Assuming the family home is
Exclusive property of Common property of Exclusive property of
the decedent the spouses the surviving spouse
Value of family home P 17,000,000 P 17,000,000 P 17,000,000
Multiply by % owned 100% 50% 0%
Decedent’s interest 17,000,000 8,500,000 0
Limit 10,000,000 10,000,000 0
Family home deduction P 10,000,000 P 8,500,000 P0

Note: When the family home is an exclusive property of the surviving spouse, none of it is reflected in the
gross estate. Hence, there should be no deduction for family home in accordance with the matching rule.

Illustration 2
Mr. Ti died leaving a family home consisting of a lot valued at P4,000,000 and a house valued at
P11,000,000.

Required:
Determine the amount to be included in the gross estate and the deductible family home under each of the
following independent cases:
Case 1 Case 2 Case 3
Lot Exclusive of Mr. Ti Common Property Common Property
House Common Property Exclusive of Mrs. Ti Exclusive of Mr. Ti

Case 1
Gross Estate % owned Family Home
Lot – EP – decedent P 4,000,000 100% P 4,000,000
House - CP 11,000,000 50% 5,500,000
To be reported in gross estate 15,000,000
Decedent’s Interest P 9,500,000
Limit P 10,000,000

Deductible family home P 9,500,000

Case 2
Gross Estate % owned Family Home
Lot – CP P 4,000,000 50% P 2,000,000
House – SP – surviving spouse 0 0 0
To be reported in gross estate 4,000,000
Decedent’s Interest P 2,000,000
Limit P 10,000,000
Deductible family home P 9,500,000
Case 3
Gross Estate % owned Family Home
Lot – CP P 4,000,000 50% P 2,000,000
House – SP – surviving spouse 11,000,000 100% 11,000,000
To be reported in gross estate 15,000,000
Decedent’s Interest P 13,000,000
Limit P 10,000,000
Deductible family home P 10,000,000

Illustration 3
Mr. Yoo’s family home as gutted by fire which resulted in his death. The family home had a value of
P20,000,000 at the time of the fire.

There shall be no deduction for family home as the property was already destroyed at the point of death.
Neither shall the loss be claimed as casualty loss pursuant to the matching rule.
BENEFITS UNDER RA 4917 (RETIREMENT OR TERMINATION BENEFIT)
Illustration 1
In 2018, Mr. W resigned from his employment and received a P2,000,000 retirement pay from his
employer’s private benefit plan. Mr. W invested P1,000,000 in the stock market and used the other
P1,000,000 to purchase a car. In 2019, Mr. W died leaving the car which now has a value of P800,000
and his investments with a value of P1,500,000.
The amount to be included in the gross estate shall be:
Car 800,000
Investment in stocks 1,500,000
Total inclusion in gross estate 2,300,000

The deduction for benefits under RA 4917 shall be nil. The NIR qualified the exemption of benefits
received as a consequence of death (i.e death benefits) rather than retirement or termination benefit
received during the lifetime of the decedent.

Illustration 2
Mr. H, a bachelor, died in a car accident. His heirs received a P1,500,000 termination pay from his
employer on account of Mr. H’s death.
The P1,500,000 termination pay shall be included in gross estate and shall likewise be presented as a
deduction against gross estate.
DEDUCTIONS ALLOWED TO NON-RESIDENT DECEDENTS

PRORATED LIT

Illustration
An unmarried non-resident alien decedent died with the following gross estate and deductions details:
Philippines Abroad Total
Family home P - P 1,200,000 P 1,200,000
Other properties estate 4,000,000 4,800,000 8,800,000
Gross estate P 4,000,000 P 6,000,000 P 10,000,000

Philippines Abroad Total

Claims against the estate P **300,000 P 2,100,000 P 2,400,000
Losses on properties 400,000 800,000 1,200,000
Transfer for public purpose P 300,000 P 400,000 P 700,000

Note: *Peso equivalents **P150,000 is unsupported.

While relaxing the matching rule with respect to deductions abroad, the total deductible amount of LIT
items must first be determined in the usual way similar to residents or citizens:

Claims against the estate (P300K-P150K + 2.1M) 2,250,000

Losses on properties (P400K-P800K) 1,200,000
Total World LIT 3,450,000

The Philippine gross estate ration shall be computed as follows:

𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐺𝑟𝑜𝑠𝑠 𝐸𝑠𝑡𝑎𝑡𝑒 P 4,000,000

= = 40%
𝑊𝑜𝑟𝑙𝑑 𝐺𝑟𝑜𝑠𝑠 𝐸𝑠𝑡𝑎𝑡𝑒 P 10,000,000

The deductible amount of each LIT to be presented in the estate tax return shall be computed as:

Claims against the estate (P2,250,000 x 40%) 900,000

Losses on properties (P1,200,000 x 40%) 480,000
Total Deductible LIT 1,660,000
PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTION)

A non-resident alien died with Philippine gross estate of P4M and foreign estate of P6M. The computed
allowable pro-rated LIT against Philippine estate is P1,660,000. The Philippine gross estate included a P1M
property which was inherited 2 years ago when its value was worth P1.2M. The foreign gross estate also
includes a P2M property which was inherited 3 years ago when it was valued P2.5M

The vanishing deduction of the non-resident alien decedent shall be computed as:

Initial value (P1M or P1.2M whichever is lower) 1,000,000

Less: Indebtedness paid 0
Initial basis 1,000,000

Initial basis 1,000,000

Less: Prorated deduction
(Initial basis/Phil. GE) x (LIT + TFPP)
[(1M/4M) x P1,660,00] 415,000
Final basis P585,000
Multiply by: Vanishing percentage for up to 2 years 80%
Vanishing deductions 468,000

Note:
No vanishing deduction can be claimed with respect to the properties located abroad because these are not
included in the Philippine gross estate.
STANDARD DEDUCTIONS
In view of the removal of the prorated funeral and judicial expense for non-resident alien decedents, the
TRAIN law allows a standard deduction of P500,000 for non-resident alien decedents.

Illustration
A non-resident alien died leaving the following gross estate:

Philippines Abroad Total

Exclusive property P 3,000,000 P 10,000,000 P 13,000,000
Communal property 7,000,000 13,000,000 20,000,000
Total Gross estate P 10,000,000 P 23,000,000 P 33,000,000

Prorated LIT P 1,200,000 P 2,800,000 P 4,000,000

Transfer to Philippine 600,000 800,000 1,400,000

government involving exclusive
property

Vanishing deduction on 600,000 800,000 1,400,000

communal property

The share of the surviving spouse and the net taxable estate of the non-resident alien decedent shall be
computed as:

Exclusive Communal Total

Gross estate P 3,000,000 P 7,000,000 P 10,000,000
Less: Deductions
Prorated LIT 1,200,000 1,200,000
Transfer for public purpose 600,000 600,000
Vanishing deduction 400,000 400,000
Net estate after deductions P 2,400,00 P 5,400,000 P 7,800,000
Less: Standard Deduction 500,000
Net estate 7,300,000
Less: Share of the surviving spouse (P5,400,000/2) 2,700,000
NET TAXABLE ESTATE P 4,600,000