Reyes & Santos Law Office

October 28, 2009 BIR RULING [DA-(I-035) 626-09] Sec. 24 (D) (2); DA-(I-005) 057-08 Reyes & Santos Law Office Unit 1003 Manila Luxury Condominium, Pearl Drive corner Goldloop St., Ortigas Center 1605 Pasig City Attention: Atty. Rizalina C. Quilit Gentlemen : This refers to your letter May 8, 2009 requesting on behalf of your client, Mrs. Angela Dee Cruz (Mrs. Cruz) for a confirmation that the sale of her principal residence situated at No. 231 Pilar Street, Addition Hills, Mandaluyong City pursuant to Section 24 (D) (2) of the Tax Code of 1997 is exempt from the payment of capital gains tax. EIAaDC It is represented that Mrs. Cruz is the registered owner of a parcel of land, consisting of One Hundred Seventy Four Square Meters (174 sq. m.), more or less, together with all the improvements existing thereon, situated at No. 231 Pilar Street, Addition Hills, Mandaluyong City, covered by Transfer Certificate of Title No. 1398 (Pilar House), of the Registry of Deeds for the City of Mandaluyong; that Mrs. Cruz, her spouse Richard Cruz, and their children have constituted and used the said Pilar House as their family home and principal residence from the time it was acquired in the year 1988; that since the Pilar House has become small for her growing family, Mr. and Mrs. Cruz have decided to purchase a bigger family home and principal residence for their family; that on September 20, 2004 Mr. and Mrs. Cruz have purchased a parcel of land consisting of Five Hundred Fifty Seven Square Meters and Fifty Square Decimeters (557.50 sq. m.) situated at No. 540 Fordham Street, Wack-Wack Village, Mandaluyong City, and covered by Transfer Certificate of Title No. 16716 (Fordham House) of the Registry of Deeds for the City of Mandaluyong; that the Fordham house has been purchased in the amount of Twenty One Million Eight Hundred Seventy Nine Thousand Pesos (P21,879,000.00); that on June 15, 2007, Mrs. Cruz has sold the Pilar House to Mr. Richard Co Dy for Three Million Five Hundred Thousand Pesos (P3,500,000.00); that the said amount of P3,500,000.00 has been fully utilized by Mrs. Cruz for the acquisition of the new Fordham House which was acquired by Mr. and Mrs. Cruz in the amount of P21,879,000.00; that on June 26, 2007, Mrs. Cruz entered into an Escrow Agreement with Revenue District Office, RDO No. 41. Isidro T. Casals, Jr., and the China Banking Corporation, whereby Mrs. Cruz placed an escrow deposit with the China Banking Corporation Trust Group, the amount of Four Hundred Fifty One Thousand Eight Hundred Ninety Nine and 60/100 (P451,899.60), equivalent to the capital gains tax due from the sale of her principal residence; that on the same date, Mrs. Cruz has filed a Sworn Declaration of Intent dated June 15, 2007, reporting the sale of the Pilar House within the required thirty (30) day period and manifesting her intention to avail of the tax exemption from capital gains tax; that on March 24, 2009, Mrs. Cruz filed a letter dated March 18, 2008 requesting for the release of the escrow deposit, which was denied by RDO No. 41, Mandaluyong City in its letter dated April 2, 2009 by Revenue District Office Isabel A. Paulino, on the following grounds: 1. On September 20, 2004, Mr. and Mrs. Cruz purchased a parcel of land together with improvements thereon located at Fordham St., Wack Wack Village, Mandaluyong City, referred to as the Fordham House. Immediately upon purchase, the family has constituted the same as their new family home and principal residence; 2. On June 15, 2007, Mrs. Cruz sold a parcel of land with improvements located at Pilar St., Mandaluyong City referred to as the Pilar House. This property was not the principal residence of the family at the time of its sale. "Principal Residence" under RR 13-99 and 14-2000 shall refer to the dwelling place of the family and actual occupancy of such principal residence shall not be considered interrupted or abandoned by reason of the individual absence therefrom. Such principal residence must be characterized by permanency in that it must be the dwelling house in which, whenever absent, the said individual intends to return. Section 24 (D) (2) applies only to sale of the principal residence, hence it shall not apply to the sale of your client's Pilar House; 3. Mr. and Mrs. Cruz have not actually entered into a contract for the construction or purchase of a new principal residence within 18 months from the date of sale of its Pilar house, therefore no utilization of the proceeds of the sale was made. Provision Section 2 (3) of the Regulations was not met; and that the Barangay Captain of Barangay Addition Hills issued a certification to the effect that Mrs. Cruz was a bonafide resident of 231 Unit C- Pilar St., Barangay Addition Hills, Mandaluyong City from August 1988 to June 15, 2007. In reply, please be informed that pursuant to 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. IaAScD We now resolve the first issue, on the basis of the certification of the Barangay Captain that Mrs. Cruz was a bonafide resident of 231 Unit C- Pilar St., Barangay Addition Hills, Mandaluyong City from August 1988 to June 15, 2007 it is clearly shown that although Mrs. Cruz had purchased the Fordham House on September 20, 2004 and treated the same as her residence, she never abandoned the Pilar house, which remained as her principal residence at the time of its sale. Second, a simple reading of Revenue Regulations No. 13-99 and 14-2000 would reveal that there is nothing in the said regulations that require that the sale of the principal residence must precede the acquisition of the new principal residence. In fact, Revenue Regulations No. 14-2000 expressly provides that: "The residential address shown in the latest income tax return filed by the vendor/transferor immediately preceding the date of sale of said real property shall be treated, for purposes of this Regulations, as a conclusive presumption about his true residential address, the certification of the Barangay Chairman, or Building Administrator (in case of a condominium unit), to the contrary notwithstanding, in accordance with the doctrine of admission against interest or the principle of estoppel." 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. From the foregoing, and since Mrs. Cruz has already fully utilized the proceeds of the sale or disposition of her property as required by law and have notified the Commissioner of the same within the prescribed period, the proceeds from the sale of your property is exempt from the 6% capital gains tax imposed under Section 24 (D) (1) of the Tax Code of 1997, but subject to the documentary stamp tax imposed under Section 196 of the same Code. (BIR Ruling No. DA-334-98 dated July 21, 1998). 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 and/or any of the requirements imposed in this letter are not complied with, 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