BIR Ruling [DA-093-05]

March 16, 2005 BIR RULING [DA-093-05] 24 (D) (1);196; 188 DA-282-97 Sta. Lucia Realty Development Corporation 3rd & 4th Flrs., Bldg. II, SLE Grand Mall Marcos Hi-way cor Felix Avenue, Cainta, Rizal Attention: Mr. Pablo S. Coronel Chief, Documentation Division Gentlemen : This refers to your letter dated February 24, 2005, requesting for exemption from capital gains tax and documentary stamp tax on the swapping of real properties between you and Sally So. It is represented that Sally So purchased from Sta. Lucia Realty & Development Inc. (Sta Lucia) a parcel of land with an area of 300 sq. m.,more or less, identified as Lot 17, Block 6, Phase 3-A, covered by Transfer Certificate of Title No. N-180671, situated at Vista Real Classica, Brgy. Diliman, Matandang, Balara, Quezon City; that the above-referred property has already been registered and transferred to Sally So; that Sta. Lucia is also the registered owner of a parcel of land with an area of 300 sq.m. identified as Lot 2, Block 1, Phase 4, covered by Transfer Certificate of Title No. N-177021 for the Registry of Deeds of Quezon City; that Sally So, considering the annotation of a Notice of Lis Pendens on its title in connection with a civil case filed by a certain Evangeline Puzon against Sta. Lucia, requested that TCT No. N-108671 be exchanged with TCT No. N-177021, which request was granted through the execution of a Deed of Exchange dated February 15, 2005; and that the exchange was entered for the sole purpose of providing Sta. Lucia's clients with properties that are free from any notice of lis pendens . SDHITE In reply, please be informed that Section 24(D)(1) of the Tax Code of 1997 provides that capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts, shall be taxed at the rate of 6% based on the gross selling price or the fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher. Such being the case, both exchanging parties i.e., you and Sally So are subject separately and distinctly to capital gains tax based on the fair market value or zonal value of the properties, whichever is higher. Moreover, pursuant to Section 196 of the Tax Code of 1997, a conveyance or deed whereby land is assigned or transferred to another is subject to documentary stamp tax based on the consideration contracted to be paid for such realty or on its fair market value or zonal value whichever is higher. (BIR Ruling No. 029-96 dated February 27, 1996, as reiterated in BIR Ruling No. DA-282-97 dated August 20, 1997) However, Article 1547 of the New Civil Code provides: "ART. 1547. In a contract of sale, unless the contrary intention appears, there is: (1) An implied warranty on the part of the seller that he has a right to sell the thing at the time when the ownership is to pass, and that the buyer shall from time have and enjoy the legal and peaceful possession of the thing; (2) An implied warranty that the thing shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer. .." Accordingly, the vendor shall be responsible for warranty against hidden defects which the thing sold may have, should they diminish in fitness for such to such extent that, had the vendee been aware thereof, he would not have acquired it or would have paid a lower price for it. When the vendor, Sta Lucia, sold the above property to herein vendee it warrants that the property shall be free from hidden defects or faults. In the instant case, the defect was only known after the buyer, Sally So, had registered the property in her name. Moreover, sale of an immovable is also covered by the Civil Code provisions on warranty against eviction. In short, the thing sold shall be free from any hidden faults or defects, or any encumbrance not declared or known to be buyer. If the immovable sold should be encumbered with any non-apparent burden or servitude, not mentioned in the agreement of such nature that it must be presumed that the buyer would not have acquired it had he been aware of such encumbrance, he may ask for the rescission of the contract, unless he prefers an appropriate indemnity. In this case, the buyer opted for a replacement of the purchased lot with another lot of the same size, and bereft of any encumbrance, i.e.,notice of lis pendens ,which is the object of the Deed of Exchange. Accordingly, since the exchange transaction is without any monetary consideration, and considering further that the execution of the Deed of Exchange is merely to replace the originally sold lot by Sta Lucia to Sally So with a new and unencumbered one, the same is not subject to the capital gains tax, imposed under Section 24(D)(1) of the Tax Code of 1997, nor to the withholding tax imposed under Revenue Regulations No. 2-98, as amended. aTHCSE Moreover, pursuant to Section 196 of the 1997 Tax Code, the Deed of Exchange is subject to the documentary stamp tax based on the consideration or value received or contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of the same Code, whichever is higher (BIR Ruling No. DA-282-97 dated August 20, 1997 citing BIR Ruling No. 029-96 dated February 27, 1996). The notarial acknowledgement to the said deed is subject to the documentary stamp tax of P15.00 only pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA 068-98 dated March 2, 1998) This ruling is issued on the basis of the foregoing representations. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group