BIR Ruling [DA-251-96]

July 17, 1996 BIR RULING [DA-251-96] Mr. Hermenigildo L. Martinez 28-B Alley 1, Project 8 Quezon City S i r : This refers to your letter dated June 17, 1996 requesting for a ruling on the tax base of the capital gains tax due on the sale by your relative Ms. Josefina Evangelista, of her real property covered by TCT No. 48465 in favor of Ms. Adoracion M. Edic and Mr. Willy Henkel on May 23, 1996. It is represented that your relative, Ms. Josefina Evangelista, a resident of Tanauan, Batangas, sold her real property located at Barangay Sola, Tanauan, Batangas covered by TCT No. 48465 on May 23, 1996 in favor of Ms. Adoracion M. Edic and Mr. Willy Henkel for and in consideration of P100,000.00; that she paid the documentary stamp tax due on the Deed of Absolute Sale of Real Property she executed for the purpose; that the BIR Lipa City where she is supposed to pay the capital gains tax on said sale transaction did not, in computing the capital gains tax due on said sale, consider the selling price or consideration appearing on the said Deed of Absolute Sale of Real Property nor the zonal valuation of the said realty; that the BIR Lipa City is more inclined to use the Redemption amount of P950,000.00 as the tax base in computing the capital gains tax on said sale transaction; that the Sheriff Sale annotated on TCT No. 48465 on December 20, 1995, did not materialize because your relative and owner of said realty, Ms. Josefina Evangelista was able to redeem her said property which consequently led to the annotation on TCT No. 48465 of cancellation of mortgage dated May 29, 1991; and that, in your understanding, in computing the capital gains tax on said sale transaction, the tax base should be whichever is higher of the consideration appearing on the Deed executed to effect the said sale or the zonal valuation of the realty as determined by this Office. In reply, please be informed that under Section 21(e) of the Tax Code, as amended, 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 trust shall be taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. From the foregoing provision of Section 21(e) of the Tax Code, it is clear that in cases involving the sale, exchange or other disposition of real property located in the Philippines classified as capital asset by an individual, among others, the tax base to be used in computing the capital gains tax imposed therein shall be the gross selling price, fair market value or the zonal valuation of the real property, whichever is higher. The said provision of Section 21(e) of the Tax Code does not, however, preclude the use of the actual consideration appearing in the Deed of Sale as the tax base in computing the 5% capital gains tax. Thus, under Revenue Memorandum Order No. 41-91, in the following instances, the actual consideration appearing in the Deed of Sale shall be an acceptable tax base in computing the capital gains tax and documentary stamp tax, viz: "1. Sale of residential lots financed by the National Home Mortgage Finance Corporation (NHMFC) under its Community Mortgage Project, in favor of poor tenant-beneficiaries. (Memorandum of the Commissioner to the RDO of Revenue District No. 25, South Manila dated March 20, 1991; BIR Ruling No. 001-91) "2. Sale of land by the National Housing Authority (NHA) as mandated under E.O. No. 90, in favor of its target clientele/beneficiaries who belong to the lowest 30-50% of the income bracket. (BIR Ruling No. 232-90) "3. Sale of real property effected through public bidding, e.g., judicial sale; extrajudicial foreclosure sale, where both the 5% capital gains tax and the documentary stamp tax were computed based on the highest or winning bid price. (BIR Ruling Nos. 101-89; 118-91) "4. Negotiated purchase and/or sale of land by a government agency or government-owned corporation. (BIR Ruling Nos. 105-91; 001-91) "5. When the State or any of its instrumentalities in the exercise of its power of eminent domain, acquires through expropriation proceedings, private real property for public use upon payment of "just compensation" to the owner. Both capital gains tax and documentary stamp tax shall be computed based on said "just compensation" as actual consideration." Such being the case, and since the instant case is not among those instances where a tax base other than that whichever is higher of the gross selling price, fair market value or zonal valuation of the real property sold may be used as an acceptable tax base in computing the capital gains tax and documentary stamp tax, this Office is of the opinion as it hereby holds that the applicable tax base in computing the capital gains tax due on the aforementioned sale transaction is the gross selling price, fair market value or zonal valuation of the realty sold, whichever is higher. Accordingly, the contemplated use by the BIR Lipa City of the Redemption amount of P950,000.00 as the tax base in the computation of the same is without legal basis. (BIR Ruling No. 101-92 dated March 20, 1992) aisadc Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Rev. Executive Assistant Legal Service