5% Capital Gains Tax is Due on the Selling Price Shown in a Mortgage Foreclosure Sale

April 1, 1997 BIR RULING NO. 029-97 21 (e) 000-00 Mrs. Rosario Rodriguez Reyes 392 Columbia St., East Greenhills Wack-Wack, Mandaluyong City M a d a m : This refers to your letter dated August 5, 1996 stating that your property located at 392 Columbia St., East Greenhills, Wack-Wack, Mandaluyong City was foreclosed by Philamlife Insurance Company and sold to the highest bidder, the Pascual-Poblete Real Estate and Management, Inc. (Pascual-Poblete) without giving you any notice; that you filed a case against Philam Life Insurance Company and Pascual-Poblete for the annulment of the Foreclosure Sale of said property at the Regional Trial Court, National Capital Judicial Region Branch 159, Pasig City docketed as Civil Case No. 64944; that on May 14, 1996, a Compromise Agreement with the approval of the court was entered into by and between you and Pascual-Poblete whereby it was agreed that upon the signing and execution of the compromise agreement you will deliver to Pascual-Poblete a manager's check dated as of May 14, 1996 in the amount of P4,430,420.00 in payment of the redemption price of the property; that the BIR of Pasig City required you to pay capital gains tax of P201,250.00; and that you are requesting for the refund of your payment for capital gains tax. In reply thereto, please be informed that a mortgage foreclosure sale is a form of conditional sale transaction (Revenue Memorandum Circular No. 41-86). The 5% capital gains tax is imposed on "capital gains" presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital asset, including pacto de retro sales and other forms of conditional sales by individuals, including estates and trusts. (Sec. 21 (e), Tax Code, as amended by Executive Order No. 37). Accordingly, the 5% capital gains tax is due on the selling price shown in the mortgage foreclosure sale. In other words, the tax should be paid after said foreclosure sale but before the registration of the certificate of sale issued by the auctioneer conducting the foreclosure sale. (BIR Ruling No. 138-87 dated May 27, 1987) The fact that the mortgagor thereafter redeemed the property did not render the collection of the tax illegal or erroneous so as to entitle the payor to a refund. It is noted that the present law [Sec. 21 (e), Tax Code, as amended] now imposes the capital gains tax on dispositions of real property classified as capital assets, including pacto de retro sales and other forms of conditional sales , which transactions do not necessarily involved absolute dispositions of real property. However, the execution of the aforesaid Compromise Agreement as a result of your action against Philam Life Insurance Company and Pascual Poblete for the annulment of the foreclosure sale of your property, in effect invalidates the said foreclosure sale. Accordingly, your redemption of your property from Pascual Poblete pursuant to the compromise agreement is just a manner of settling your obligations with your property as the collateral directly with Philamlife Insurance Company. Such being the case, your request for the refund of P201,250.00 the capital gains tax paid by you on the aforesaid foreclosure sale is hereby granted. 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, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue