BIR Ruling [DA-322-05]

July 19, 2005 BIR RULING [DA-322-05] 24 (D) (1); 196; DA-096-03 Atty. Jane D. Laplana Philtrust Bank Building United Nations Avenue cor. San Marcelino St. Manila M a d a m : This refers to your letter dated March 1, 2005 requesting for exemption from the payment of capital gains tax and documentary stamp tax on the swapping of real properties to correct a mistake and without consideration. The facts of the case are as follows: "1. Francia Liwanag is the registered owner of parcel of registered land located at No. 104 San Antonio St., SFDM, Quezon City. She acquired this property on September 19, 1974 and had built improvements thereon consisting of a 9-door apartment. Since September 1974 up to the present, Francia Liwanag is in actual and peaceful possession of her property. As evidence of her ownership, she was issued by the Registry of Deeds of Quezon City TCT No. RT-35024 (202914) describing her property as Lot 12, Block 125 and Psd-1650. A copy of the title is hereto attached as Annex "B". Both the land and improvements are declared for taxation purposes with the real estate taxes having been paid up to date. Copies of the Tax Declaration and Tax Receipts are hereto attached as Annexes "B-1" and "B-2"; "2. Spouses Pio T. Paterno, Jr. and Naty O. Paterno, on the other hand, are the registered owners of the property adjacent to the property of Francia Liwanag, and located at No. 106 San Antonio St., SFDM, Quezon City. They acquired this property on June 11, 2003 and since then, had built improvements thereon. Since June 2003 and up to the present, Sps. Paterno are in actual and peaceful possession of their aforesaid property. As evidence of their ownership, they were issued TCT No. N-250993, describing their property as Lot 13 Blk 125, Psd-1650. A copy of the title is hereto attached as Annex "C". Both the land and improvements are likewise declared for taxation purposes with the real estate taxes having been paid up to date. Copies of the Tax Declaration and Tax Receipts are hereto attached as Annexes "C-1" and "C-2"; cDCaTS "3. Sometime in June 2004, Sps. Paterno applied for a loan with a financial institution and caused their property surveyed for purposes of the loan transaction. In the course of the survey, it was found out, to their shock and dismay, that the property described in their title is not the property they are presently occupying but the adjacent lot being occupied by Francia Liwanag. Subsequently, Sps. Paterno conveyed this fact to Francia Liwanag who then verified the metes and bounds of her property as described in her title. To her frustration, the property she owns and occupies for decades is not the one being described in her title but that of the adjacent lot owned and occupied by Spouses Pio and Naty Paterno. A copy of the Survey Report prepared by Engr. Benigno G. Bondoc who conducted the relocation and subdivision survey is hereto attached as Annex "D". The subdivision plan and the tax map are hereto attached is Annexes "D-1" and "D-2"; "4. In other words, there was a mixed-up in the issuance of titles to Francia Liwanag and to the predecessors-in-interest of Sps. Paterno from whom they acquired the property. Francia Liwanag owns and occupies Lot 13, Blk. 125, Psd-1650 with an actual area of 707 sq. meters but the title to this described property is in the name of Sps. Pio and Naty Paterno. Spouses Paterno, on the other hand, own and occupy Lot No. 12, Blk 125 with an actual area of 712 sq. meters but the title to this property is in the name of Francia Liwanag; "5. The parties believed in good faith that the properties they are respectively occupying and on which they had constructed considerable improvements are owned by them. In order to correct the mistake in the titles and to make the parties the proper and true registered owners of their respective properties of which they are in actual possession, they mutually agreed to execute the Deed of Exchange of Real Property (Annex "A") without any monetary consideration at all. Each party had built important improvements on the property they owned and occupied, and it is for their best interest that they will interchange and/or swap their titles, such that Francia Liwanag will become the registered owner of the property described as Lot 13, Blk. 125, Psd-1650 and presently covered by TCT No. N-250993, the property she is actually occupying; and Spouses Pio and Naty Paterno will be issued a new title as owners of the property they are actually occupying described as Lot 12, Blk. 125, Psd-1650 and presently covered by TCT No. RT-35024 (202914). In short, the parties will only swap their titles and become the registered owners of the properties they are in actual possession; "6. The transaction between Francia Liwanag and Spouses Pio and Naty Paterno has no monetary consideration whatsoever but was made only to correct the records in the registry of Deeds of Quezon City, so that new titles may be issued to reflect the actual owners of the property the parties are respectively occupying; ScaEIT "7. Because there was no monetary consideration involved and no capital gain was derived by the parties as a result of the transaction, as in fact, there was no physical exchange of properties as the parties only swapped their respective titles, it is humbly prayed that the Deed of Exchange of Real Property executed by Francia Liwanag and Spouses Pio and Naty Paterno be exemption from the payment of capital gains tax and documentary stamp tax." In reply, please be informed that since the exchange transaction is without any monetary consideration, and considering further that the execution of the Deed of Exchange is merely for the purpose of correcting the mistake above-described, the exchange of realty by and among Francia Liwanag and Spouses Pio and Naty Paterno 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. Furthermore, the said swapping of real property is not likewise subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. However, the notarial acknowledgment of 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-096-03 dated March 26, 2003) This ruling is issued on the basis of the foregoing facts as represented, 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service