BIR Ruling [DA-220-05]

May 5, 2005 BIR RULING [DA-220-05] Sec. 24 (D) (2) Exchange of Principal Residence Sps. Alberto and Azucena Malvar No. 31 Regidor Street, Loyola Heights Quezon City Gentlemen : This refers to your letter dated January 26, 2005, signed with the Sps. Antonio and Conchita Nachura, requesting for a confirmation of your opinion that 1) The exchange of principal residence between the spouses Alberto and Azucena Malvar ("Spouses Malvar") and the spouses Anotonio and Conchita Nachura ("Spouses Nachura"), as contained in a Deed of Exchange, qualifies as an exemption to the payment of capital gains tax (CGT) pursuant to Section 24(D)(2) of the Tax Code of 1997; and 2) There is no need for the parties to the Deed of Exchange to deposit money in an escrow account. It is represented that Spouses Malvar are the registered owners of a house and lot located at 33 Regidor Street, Loyola Heights, Quezon City ("33 Regidor"), which is the current principal residence of Spouses Malvar while Spouses Nachura are the registered owners of a house and lot located at 31 Regidor Street, Loyola Heights, Quezon City ("31 Regidor"), which is also the current principal residence of Spouses Nachura; that the Spouses Malvar and Nachura exchanged their respective principal residence by executing a Deed of Exchange notarized on February 14, 2005, whereby the ownership of 31 Regidor will be transferred to Spouses Malvar, and at the same time, the ownership of 33 Regidor will be transferred to Spouses Nachura. In support of your above request, you submitted the following documents: 1) Deed of Exchange; 2) Certified true copy of the Transfer Certificate of Titles of the Properties; 3) Certified true copies of the Real Property Tax Declarations covering the Properties; 4) Certificate of Non-delinquency of the payment of the realty taxes on the Properties; 5) Photocopies of the official receipts evidencing payment of the realty taxes on the Properties for the current year; and 6) Certification on the zonal value of the Properties. In reply, please be informed that pursuant to Section 24(D)(2) of the Tax Code of 1997, as amended, capital gains presumed to have been realized from the sale or disposition of principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under Section 24(D)(1) of the same Code, provided, that the historical cost or adjusted cost basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired, and that the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of your intention to avail of the tax exemption thus mentioned, and which can only be availed of once every ten (10) years. The same Section further provides that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax for this purpose, the zonal value of the lots determined in accordance with Section 6(E) of the same Tax Code and the fair market value of the improvements as indicated in the corresponding tax declaration at the time of the exchange, shall be compared in order to determine the taxable portion for the purpose of computing the tax prescribed under Section 24(D)(1) of the same Tax Code. The difference in the amount of the zonal value of the lots and the fair market value of the improvements as indicated in the corresponding tax declaration shall be the basis in computing the 6% capital gains tax. From the foregoing, and since by exchanging your respective principal residence you have, in effect, utilized the proceeds of the sale or disposition of your respective property as required under Section 24(D)(2) of the Tax Code of 1997, as amended, and that you have notified the Commissioner of the same within thirty (30) days from the said exchange or disposition of your properties, your opinion that the above swap or exchange of principal residence is exempt from the 6%, capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997, as amended, is hereby confirmed. However, if in the said exchange, the properties swapped are of different values, the difference thereof shall be taxed in the manner as above provided. On the other hand, the said swapping of principal residence is subject to the documentary stamp tax imposed under Section 196 of the same Code.Two (2) separate documentary stamp taxes based on the fair market value of both properties as determined in accordance with Section 6(E) shall be collected on the said swap or exchange of principal residence. cSATEH Finally, your request that the parties to the above swap or exchange of principal residence shall be exempted from the requirement of putting up an escrow account to answer for any tax liability for failure to comply with the full utilization requirement is hereby granted. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different and/or any of the requirements imposed in this letter are not complied with, 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 & Inspection Group