Payment of Capital Gains Tax within the Two-Year Redemption Period Not Subject to Surcharge and Interest

August 2, 2005 BIR RULING NO. 010-05 R.A. 720 000-00 Rural Bank of New Washington (Aklan), Inc. New Washington, Aklan Attention: Mr. Raul D. Balandra Gentlemen : This refers to your letter dated March 15, 2005 requesting for an early resolution of your case. The only issue to be resolved here is whether or not the payment of capital gains tax more than a year after the said registration but within the two (2)-year redemption period under Republic Act (R.A.) No. 720, as amended by R.A. 5939, providing for a two (2)-year redemption period from the date of registration of the certificate of foreclosure sale of homestead or free patent lands, is subject to surcharge and interest. It is represented that subject property with Transfer Certificate of Title No. T-13669 was acquired pursuant to a free patent granted under Commonwealth Act No. 141; that foreclosure action was initiated by your Bank in July 2001; that a Certificate of Sheriff Sale was issued by the Provincial Sheriff on February 14, 2002 and duly registered with the Register of Deeds of Aklan on March 6, 2002; that the Final Deed of Sale was issued by the Provincial Sheriff of Aklan on March 24, 2004 and duly notarized on April 21, 2004; and that capital gains tax and documentary stamp tax in the amount of P12,960.00 and P3,240.00, respectively, were paid to United Coconut Planters Bank-Kalibo Branch on March 17, 2004. HEacDA In reply, please be informed that under the provision of Section 5 of R.A. No. 720, otherwise known as the Rural Bank Act, as amended by R.A. No. 5939, in case of foreclosure of a mortgage involving a homestead or land acquired under a free patent, the homesteader or free patent holder as well as his heirs shall have the right to redeem the property sold in foreclosure within a period of two (2) years from the date of the auction sale in case of land not covered by a Torrens title or two (2) years from the date of the registration of the foreclosure in case of land covered by a Torrens title. Section 5 of R.A. No. 720, as amended, liberalizes the duration of an existing right of redemption in extrajudicial foreclosure sales by extending the period of one (1) year fixed in Act No. 3135, as amended by Act No. 4113, to two (2) years insofar as lands acquired under free patent and homestead statutes are concerned. Thus, if the land is mortgaged to a rural bank under R.A. No. 720, as amended, the mortgagor may redeem the property within two (2) years from the date of foreclosure or from the registration of the sheriff's certificate of sale at such foreclosure if the property is not covered or is covered, respectively, by a Torrens title. However, if the land is mortgaged to parties other than rural banks, the mortgagor may redeem the property within one (1) year from the registration of the certificate of sale pursuant to Act No. 3135. ( Rural Bank of Davao vs. Court of Appeals , G.R. No. 83992, January 27, 1993). In view of the foregoing and since the mortgagee in the instant case is a rural bank covered by the provisions of the Rural Bank Act, as amended, the imposition of penalty and surcharge for late payment of taxes is not warranted in this case. The payment of the capital gains and documentary stamp taxes made on March 17, 2004 was within the prescribed period for paying such taxes considering that the right to redemption of the mortgagor lapsed after two (2) years from the foreclosure sale, or on March 6, 2004. The expiration of the two (2) year period for redemption resulted in the consolidation of ownership over the foreclosed property. Thus, the thirty (30) day period within which to pay the capital gains tax is reckoned from March 6, 2004. However, the payment of the documentary stamp tax should be made on or before the fifth (5th) day of the month following the execution of the Final Deed of Sale made by the Sheriff. 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 as null and void. aDHCcE Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue