Mrs. Florencia B. Bacolod

July 6, 2009 BIR RULING [DA-(I-015) 351-09] Sec. 24 (D) (1); 106; 196; UN-276-95; 660-99; DA-397-2000; DA-219-2005; DA-653 & 654-2006; DA-334-98 & DA-088-02 Mrs. Florencia B. Bacolod No. 1553 Carissa St., Dasmarias Village Makati City Madam : This refers to your letter dated June 30, 2009 stating that you sold your principal residence located at No. 1553 Carissa St., Dasmarias Village, Makati City, to S & J Int'l. Corporation; that you already paid the capital gains tax and the documentary stamp tax due on such sale at the revenue district office (RDO) having jurisdiction over your above-mentioned principal residence on June 16, 2009; that while you were processing the release of the Certificate Authorizing Registration (CAR) you were informed that your above sale of real property is subject to value-added tax (VAT); that the foregoing treatment, accordingly, is due to the fact that in your Certificate of Registration (COR) with the Bureau of Internal Revenue (BIR), it appears that you are engaged in buying, selling, and renting or leasing of residential dwellings, thus, the classification of the subject realty as part of your inventory for sale or for lease; that in your COR it is reflected therein that your residential address is No. 1553 Carissa St., Dasmarias Village, Makati City; and that it is your contention that your above sale of real property should not be subject to VAT since the same was constituted as your principal residence and that it was never leased or rented out to anybody, hence, it was properly classified and declared as capital asset. In view of the foregoing, you are requesting for the issuance of a ruling stating, in effect, that you are qualified to be exempt from the payment of VAT on the sale of your above principal residence the same being a capital asset, and that if you will be able to fully utilize the proceeds of the said sale, you will be entitled to a refund in your payment of the capital gains tax due thereon. In reply, please be informed that the term "capital asset" as negatively defined in Section 39 (A) (1) of the Tax Code of 1997, means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowances for depreciation provided in Subsection (F) of Section 34, or real property used in trade or business of the taxpayer. In view of the foregoing, and inasmuch as the property you sold was constituted as your principal residence as evidently shown in your COR, and was never used in business and neither was it offered for lease to third party, the said realty, accordingly, is properly considered as a capital asset. Consequently, the sale of said realty is subject to the 6% capital gains tax under Section 24 (D) (1) of the Tax Code of 1997, as amended. (BIR Ruling No. 660-99 dated November 29, 1999; BIR Ruling No. DA-397-2000 dated November 20, 2000 citing UN-276-95 dated July 26, 1995; Rev. Regs. No. 7-2003) HEDSCc Moreover, the above sale of your principal residence is not subject to the 12% VAT imposed under Section 106 of the 1997 Tax Code, as amended, in accordance with Sec. 4.109-1 (B) (p) of Revenue Regulations (RR) No. 16-2005, as amended by RR 4-2007, implementing Republic Act No. 9337. (BIR Ruling No. DA-219-2005 dated May 5, 2005 cited in BIR Ruling Nos. DA-653 & 654-2006, both dated November 7, 2006) On the other hand, under Section 24 (D) (2) of the Tax Code of 1997, as amended, capital gains presumed to have been realized from the sale or disposition of principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under Section 24 (D) (1) of the same Code, provided, that the historical cost or adjusted cost basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired, and that the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of your intention to avail of the tax exemption thus mentioned, and which can only be availed of once every ten (10) years. The same Section further provides that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the selling price in order to determine the taxable portion for the purpose of computing the tax prescribed under Section 24 (D) (1) of the Tax Code of 1997, thereon. (BIR Ruling No. DA-334-98 dated July 21, 1998) From the foregoing, upon presentation of documents showing full utilization of the proceeds of the sale or disposition of your principal residence as required by law and having notified the Commissioner of the same within the period as prescribed under Section 56 (A) (3) of the Tax Code of 1997, as amended, you may claim for a refund of the 6% capital gains tax you already paid to the BIR, subject to the two-year prescriptive period as provided for under Section 204 (C) of the same Tax Code. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service