BIR Ruling [DA-516-99]

September 6, 1999 BIR RULING [DA-516-99] Mr. Ricardo D. Balatbat 3rd Floor, Athenaeum Condominium 160 Alfaro St., Salcedo Village Makati City S i r : This refers to your letter dated August 27, 1999 requesting for a ruling that the Deed of Exchange between you and Mr. Suresh Parmanand exchanging the parcels of land covered by Transfer Certificate of Title (TCT) Nos. 197871 and 185747 is not subject to the capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997 and to the documentary stamp tax prescribed under Section 196 of the same Code. It is represented that on July 6, 1993, you bought a piece of land denominated as Lot 27-A, on which an improvement has been erected; that similarly, Mr. Suresh Parmanand bought the adjacent lot denominated as Lot 27-B of the same block, street and city; that also an improvement has been erected thereon; that unfortunately, the Deed of Sale executed by the seller denominated Lot 27-B as the lot you supposedly to have bought when in fact it was Lot No. 27-A; that similarly, in the case of Mr. Suresh Parmanand, he bought and occupied Lot 27-B but the deed of sale denominated it to be Lot 27-A; that probably, it would have been simpler if you and Mr. Suresh Parmanand just move over to your respective lot per deed of sale except for the fact that improvements have already been erected by you and Mr. Suresh Parmanand in the respective lot you occupied; and that there is no other alternative therefore but to execute the aforesaid Deed of Exchange to correct the anomaly. In reply, please be informed that pursuant to Section 24(D)(1) of the Tax Code of 1997, capital gains tax 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 trusts, shall be taxed at the rate of 6% based on the gross selling price or the fair market value prevailing at the time of the sale, whichever is higher. From the foregoing provisions of Section 24(D)(1) of the Tax Code of 1997, it appears that parties to the exchange of real properties located in the Philippines classified as capital assets are subject to the 6% capital gains tax based on the gross selling price or the fair market value/zonal value prevailing at the time of the sale/exchange, whichever is higher. (BIR Ruling No. 261-87) Considering, however, that the reason for the execution of the Deed of Exchange covering the aforesaid real properties (with TCT Nos. 197871 and 185747), was merely to correct the error committed in the sale document executed by the seller of said realties denominating Lot 27-B as the lot you bought instead of Lot 27-A and vise versa in the case of Mr. Suresh Parmanand thereby resulting in both parties holding title to the lot being occupied by the other party. Such being the case, this Office is therefore of the opinion as it hereby holds that the exchange transaction you entered into on July 6, 1999 with Mr. Suresh Parmanand covering your respective parcels of land covered by TCT Nos. 197871 and 185747 is not subject to the capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997 and to the documentary stamp tax prescribed under Section 196 of the same Code. (BIR Ruling Nos. DA-305-99 dated May 18, 1999 and 008-95 dated January 16, 1995) However, it is subject to the documentary stamp tax of P15.00 on the acknowledgment on said Deed of Exchange. 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)