Exemption from the Capital Gains Tax

January 6, 1981 BIR RULING NO. 001-81 034-h 000-00 001-81 Mr. Primitivo S. Solis, Jr. 21 Avancea Street, Phase II B.F. Subdivision, Paraaque Metro Manila S i r : This refers to your letter dated July 15, 1980 inquiring whether capital gains tax is due from you on the sale that you made recently of a residential land. The papers you submitted show that in 1978 you acquired a lot the original cash purchase price of which, exclusive of interests and penalties was P117,800.00; that you made a down payment of P11,780.00 therefor; that the balance was covered by a mortgage contract for P106,020.00; that as of July 7, 1980, the outstanding balance was P96,682.56, the amortization you had made totalled P9,337.44 and the interest and penalties you had paid amounted to P22,811.28 already; that you sold this lot to a buyer who assumed the outstanding balance of the principal (P96,682.56) and who agreed to return to you the amount of money you have paid to the bank consisting of P11,780 as down payment and the monthly amortization inclusive of interests and penalties for late payment amounting to P32,148.72 as of the date of your letter; that the Deed of Sale executed between you and your buyer reflects the sum of P140,611.28 as the valuable consideration thereof; and that the difference of P22,811.28 between P140,611.28, the price stated in the aforesaid deed of sale and P117,800, the original purchase price, represents the interest and penalties for your late payments to the bank. cdti In reply, please be informed that inasmuch as the discrepancy between the original purchase price (acquisition cost) and the selling price of the lot you sold consists of the interests and penalties incident to your delinquent payment, the said difference to the extent of the interest payment which has been claimed as a deduction from your gross income during the year of sale, should not form part of your cost. Consequently, the amount claimed as interest expense shall be subject to the capital gains tax as provided under Section 34(h) of the National Internal Revenue Code of 1977, as amended by Batas Pambansa Blg. 37. Very truly yours, RUBEN B. ANCHETA Acting Commissioner