BIR Ruling

October 22, 1968 Mr. Guillermo S. Lorenzana 175 A. Rita, San Juan, Rizal S i r : This refers to your letter dated October 10, 1968 requesting information as to the tax consequence of the proposed exchange of property, i.e., a parcel of land is exchanged for another parcel of land. It is represented that lot owner A owns a parcel of land with an area of 5,169 square meters more or less. The property was acquired at P10.00 per square meter but its present market value is more or less P100.00 per square meter. The owner thereof is contemplating to exchange the said property with a parcel of land owned by lot owner B, which is 4,985 square meters more or less and which was acquired recently at P100.00 per square meter. Both lots are located in the same street and are almost facing one another. It is further requested that the reason for the exchange is that Owner B who cannot utilize his lot for light industrial purpose has to exchange his lot for that of Owner A who does not like to sell his lot but is willing to exchange it for the lot of owner B. In reply, I have the honor to inform you that gain may be realized from exchange of property as provided for by Section 35(c)(1) of the Tax Code, only when as a result of a transaction between the owner and another person the property is converted into other property (a) that is essentially different from the property disposed of and (b) that has a market value. This requirement implies that there must be change in substance and not merely a change in form. (Sec. 140, Income Tax Regulations) Inasmuch as the properties, subject to the exchange, are both parcels of land, located in the same street and can be sold for about the same price, the exchange will not give rise to a taxable gain and owner A, therefore, shall not be liable for income tax. However, the acquisition cost of the lot received by A in exchange for his lot which he acquired for P10.00 per square meter shall, for income tax purposes, be also P10.00 per square meter and if he later sells the lot acquired by said exchange, its acquisition cost shall be considered at P10.00 per square meter. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue