BIR Ruling [DA-488-05]

December 2, 2005 BIR RULING [DA-488-05] 24 (D) (1); DA 145-00 Benedicto Verzosa Gealogo & Burkley 11th Floor, BPI Building Ayala Avenue corner Paseo de Roxas Makati City Attention: Atty. Noravir A. Gealogo Gentlemen : This refers to your letter dated September 2, 2005 stating that a Memorandum of Agreement to Exchange Properties was executed by and between the Spouses Adriano S. Pantino III and Marlene L. Pantino (Spouses Pantino) and Spouses Rufino A. Gealogo and Charito M. Gealogo (Spouses Gealogo), whereby the latter have agreed to cede, transfer and convey unto the former the real property covered by TCT No. 148363 with an area of 240 square meters located at Vietnam Street, Better Living Subdivision, Paraaque City; that on the other hand, Spouses Pantino have likewise agreed to cede, transfer and convey unto the Spouses Gealogo the real property covered by TCT No. 29862 with an area of 240 square meters and also located at Vietnam Street, Better Living Subdivision, Paraaque City; that the transaction was made without any monetary consideration and was undertaken in order to rectify a mistake; that both properties which are situated adjacent and contiguous to each other, were previously owned by the Spouses Rodolfo S. Manantan and Leoncia Olivas-Manantan (Spouses Manantan); that Spouses Manantan offered to sell and the Spouses Pantino agreed to buy Lot 28 and possession of Lot 28 was delivered and turned over to the possession of the Spouses Pantino; that however, what was inadvertently documented in the Deed of Sale and the title that was transferred to the Spouses Pantino was the title which covers Lot 30; that subsequently, the Spouses Manantan offered to sell and the Spouses Gealogo agreed to buy Lot 30 and possession of Lot 30 was delivered and turned over to the possession of the Spouses Gealogo; that however, what was documented in the Deed of Sale and the title that was transferred to the Spouses Gealogo was the title which covers Lot 28; that all the parties were of the understanding that the Spouses Gealogo own Lot 30 while the Spouses Pantino own Lot 28; that when the Spouses Gealogo availed of a housing loan with Metrobank, they constructed their house on Lot 30, the property turned over to them by the Spouses Manantan; that the representatives of Metrobank appraised, evaluated and inspected the property before, during and after the construction; that Spouses Goalogo engaged the services of a well experienced contractor to construct the house; that they obtained all the necessary permits for the construction; that the corresponding occupancy permit and tax declaration for the house have also been issued in their favor; that no one noticed that the house was constructed on Lot 28 when the Spouses Gealogo's land title covers Lot 30; that the Metrobank loan availed by the Spouses Gealogo is annotated on the title covering Lot No. 28 registered in the name of the Spouses Gealogo while the house was actually constructed on Lot No. 30; and that it took several months after the Spouses Gealogo have moved in to their new house when the Spouses Pantino and the Spouses Gealogo realized that the house was constructed on the wrong lot. Based on the foregoing representations, you now request confirmation of your opinion that the exchange of the above-described properties by Spouses Gealogo and Spouses Pantino in order to correct the mistake committed and without any monetary consideration is not subject to capital gains tax and documentary stamp tax; likewise, the consequent amendment to the Real Estate Mortgage in favor of Metrobank is not subject to the corresponding documentary stamp tax. In reply thereto, please be informed that since the exchange transaction is without any monetary consideration, and considering further that the execution of the Memorandum of Agreement is merely for the purpose of correcting the mistake above-described, the exchange of realties by Spouses Gealogo and Spouses Pantino is not subject to the capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997. Moreover, the said swapping of real properties is not likewise subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. However, the notarial acknowledgment to the Memorandum of Agreement is subject to the documentary stamp tax of P15.00 only pursuant to Section 188 of the said Code. (BIR Ruling No. DA 145-00 dated March 10, 2000) Finally, as a consequence of the above transaction, the Real Estate Mortgage executed by Spouses Gealogo in favor of Metrobank will have to be amended to reflect the new title to be issued in the name of Spouses Gealogo. As such, the amended Real Estate Mortgage is not subject to the documentary stamp tax since it will only be executed to rectify an error and considering further that the Spouses Gealogo have already paid the documentary stamp tax on the said Real Estate Mortgage presently annotated on the title covering Lot 28. 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 Assistant Commissioner Legal Service