BIR Ruling [DA-523-99]

September 13, 1999 BIR RULING [DA-523-99] Efren N. Dela Cruz & Associates Rm. 206 BPI Office Condominium 150 Plaza Cervantes, Binondo Manila Gentlemen : This refers to your letter dated June 24, 1999 stating the following: 1. Mr. William Uy married to Ellen Ngo Uy, is the registered owner of a parcel of land situated at Brgy. La Huerta, Paraaque City covered by TCT No. 140150 issued by the Registry of Deeds for Paraaque City and containing an area of 300 square meters; while Mr. Pepito Coronel married to Salud Coronel, is likewise the registered owner of a parcel of land in the same Brgy. La Huerta, Paraaque City, immediately adjacent to the property of the former covered by TCT No. 51207 issued by the Registry of Deeds for Paraaque City and containing an area of 150 square meters; 2. Mr. Pepito Coronel has bought in good faith his residential house and lot from its previous owner Oasis Realty and Development Corporation, a registered and reputable development company which had erroneously constructed a residential house of strong materials on Mr. William Uy's property, mistaking that the said lot was the one covered by TCT No. 51207; 3. To avoid the needless demolition of the said residential house on Mr. William Uy's property, Mr. Pepito Coronel has offered to exchange his lot covered by TCT No. 51207 with the lot owned by Mr. William Uy covered by TCT No. 140150, and Mr. William Uy has accepted the said offer of the latter; 4. On July 31, 1999, a Deed of Exchange was executed by and between Mr. William Uy and Mr. Pepito Coronel whereby the parties exchanged their respective lots such that the former shall become the owner of that parcel of land covered by TCT No. 51207 while the latter shall become the owner of that parcel of land covered by TCT No. 140150, under the following terms and conditions: (a) The parties shall share equally in all the expenses incurred in the subdivision of Mr. William Uy's property into Lot 14-A and Lot 14-B; and (b) Mr. Pepito Coronel shall shoulder all the expenses incurred and to be incurred in the cancellation of the mortgage in favor of National Home Mortgage Finance Corporation. Based on the foregoing representations, you now request for a ruling that the Deed of Exchange executed by and between Mr. William Uy and Mr. Pepito Coronel for the purpose of correcting an error, as in this case, is not subject to capital gains tax and documentary stamp tax. In reply, please be informed that under Section 24(D)(1) of the Tax Code of 1997, 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 trusts; shall be taxed at the rate of 6% based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the said Code, whichever is higher. However, since in the instant case there is no actual sale, exchange or disposition of real property for a valuable consideration, but a mere exchanging of the lots in question without consideration and only for purposes of rectifying a mistake, this Office is of the opinion as it hereby holds that the Deed of Exchange entered into by and between Mr. William Uy and Mr. Pepito Coronel is not subject to the capital gains tax imposed under the above-cited section of the Tax Code. Moreover, the said Deed of Exchange is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, since the same was executed without any valuable consideration, which under Section 185 of Regulations No. 26, otherwise known as the "Revised Documentary Stamp Tax Regulations" conveyance without valuable consideration is not taxable. However, the acknowledgment on said Deed is subject to a documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. UN115-97 dated March 19, 1997) 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. LexLib Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)