Atty. Jaime M. Maza

July 20, 2007 BIR RULING [DA-401-07] Sec. 27 (D) (5) & 196; DA-036-2000 Atty. Jaime M. Maza #2 Carnation St., St. Dominic #5 Tandang Sora, Quezon City S i r : This refers to your letter dated November 23, 2006, in behalf of the counsel of Mr. Genaro Cabrera, inquiring into whether or not a purchaser of real property in a public auction for non-payment of real estate taxes is subject to capital gains tax. It is represented that the Provincial Treasurer of the Province of Antique issued a Final Deed to the purchaser, Mr. Genaro Cabrera, on October 18, 2006; that before the registration of the property, the Register of Deeds required a tax clearance from the Revenue District Officer of Antique who computed the alleged capital gains tax due thereon; that under Section 24 (D) of the Tax Code of 1997, only individual owners/sellers of capital assets where gains are presumed to have been obtained are required to pay capital gains tax; that since Mr. Genaro Cabrera is the purchaser of the property, he is not subject to the capital gains tax (CGT); that it is clear from the attached document that the seller is the Provincial Government through the Provincial Treasurer; that the Provincial Government is not liable to pay the capital gains tax because it is not an individual but a political subdivision of the Government exercising essential governmental function that is the collection of taxes; that thus the income therefrom is excluded from tax under Sec. 32 (B) (7) (b) of the Tax Code of 1997. In reply, please be informed that since the sale of the realty of the delinquent taxpayer is the enforcement by the Province of Antique of its tax lien for unpaid real estate taxes and is being conducted through public bidding or on public auction sale, this office is of the opinion as it hereby holds that the tax base in computing the capital gains tax and the documentary stamp tax on such sale transaction should, as in the case of mortgage foreclosure sale under Act 3135, as amended, be likewise on the highest bid price. Hence, the capital gains tax and the documentary stamp tax due on the said sale of the realty your client purchased in the public auction sale by the Province of Antique should be computed on the highest bid price, which shall be for the account of the delinquent taxpayer since the sale by the Province of Antique is for and in behalf of the former, and it is just enforcing a tax lien for the unpaid real property taxes. DSIaAE The statutory seller in this particular case is the Provincial Government of Antique. However, although under the Tax Code, the person liable to pay the CGT is the owner of the property, the CGT though is required to be paid upon consolidation of title over the property by the highest bidder which shall be made after the lapse of 1-year redemption period. If redeemed, there is no CGT due. But, if the owner fails to redeem the property, the highest bidder who, in most cases is the statutory seller, pays the CGT and DST, in order that a property may be registered under its name upon the registration of the Certificate of Sale. There is no exemption from taxes in case of foreclosure sale. The Tax Code requires payment of CGT/DST even on conditional sales of real property. In view thereof, it is the opinion of this office that Mr. Genaro Cabrera, who is the new purchaser/buyer of the subject property, is not subject to the capital gains tax under Section 24 (D) of the Tax Code. However, the statutory seller (the Province of Antique) may opt to add all its expenses incurred (i.e., includes CGT & DST) in acquiring the property as part of the selling price. 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, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Asst. Commissioner Legal Service