Tax Consequence of Swapping of Properties

February 10, 1988 BIR RULING NO. 037-88 21 (e) 205-87 037-88 Gentlemen : This refers to your letter dated November 2, 1987 stating as follows: "Our client, Olivia Sy, Sonia Dy, and Jane Otchengco are sisters, who each owned a one-third share in what was once a single property, now individually titled to them as follows: cdta Owners TCT No. Area Sonia Dy 302685 176.50 sq.m. Jane Otchengco 302686 176.60 sq.m. Olivia Sy 307687 176.60 sq.m. They would like to swap properties among themselves such that, 1.) Sonia will receive Olivia's lot; 2.) Jane will receive Sonia's lot; and 3.) Olivia will receive Jane's lot; none of them acquiring pecuniary gain and none of them putting up or receiving cash or any other properties. The subject properties are substantially the same in quality, nature, value, these being adjacent to each other." In connection therewith, you now request a ruling as to whether or not the aforementioned transaction is subject to the capital gains tax. In reply thereto, I have the honor to inform you, that your clients, Mesdames Sonia Dy, Jane Otchengco and Olivia Sy are each subject to the capital gains tax at the rate of 5% based on the fair market value of their respective properties pursuant to Section 21(e), of the Tax Code, as amended by Executive Order No. 37 quoted as follows: "(e) Capital gains from sales of real property . The provisions of Section 34(b) notwithstanding, capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts, shall be taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 21(a) or under the subsection, at the option of the taxpayer." It will be noted from the above-quoted provision that exchanges of real property classified as capital assets by individuals, such as the above transaction are subject to the 5% capital gains tax prescribed therein. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner