BIR Ruling No. 038-15

February 9, 2015 BIR RULING NO. 038-15 Sections 24 (D) (2) & 196 NIRC; BIR Ruling No. 345-2013 Mr. Jeffrey D. Cortazar Unit No. 16, Agoncillo Townhomes 1318 Agoncillo Street, Ermita Manila Sir : This refers to your letters dated December 1, 2011 and July 23, 2013, duly indorsed to this Office by Revenue Region No. 7, Quezon City by way of 2nd Indorsement dated March 20, 2014, requesting for exemption from capital gains tax (CGT), and consequently for the refund of the amount of the CGT paid, on the sale of a real property used as a principal residence pursuant to Section 24 (D) (2) of the 1997 Tax Code, as amended. It is represented that Mr. Jeffrey D. Cortazar ("Mr. Cortazar") bought in July 2003 a condominium unit at Phoenix Heights Condominium located at 40 Javier corner Floro Streets, Pasig City, which he allegedly used as a permanent/principal residence from 2003 until January 2012. In November 2011, he purchased a Townhouse unit located at 1318 Agoncillo St., Ermita, Manila, from the Trans-Phil Builders Corporation for a cash discounted price of P7,443,250.00. He paid therefor the reservation deposit of P100,000.00 on November 22, 2011 and the balance of P7,264,900.00 was fully paid on December 30, 2011 as evidenced by Official Receipt Nos. 11931 and 11932 issued by the Trans-Phil Builders Corporation. On March 7, 2012, he executed a Deed of Absolute Sale over his condominium unit at Phoenix Heights Condominium in favor of the SNR Management, Inc. for the amount of P7,000,000.00, for which the corresponding CGT, in the amount of P420,000.00, and documentary stamp tax (DST) in the amount of P105,000.00, due on the transfer were accordingly paid on March 15, 2012 as evidenced by the Land Bank of the Philippines (LBP) Validation Nos./Official Receipt Nos. A-20062 #09 and A-00050 #03. In reply, please be informed that Sec. 2.57.1.(A) of Revenue Regulations (RR) No. 2-98, implementing Section 24 (D) (2) of the Tax Code of 1997, as amended, provides: "In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from the agreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or manager's check in interest-bearing account with an Authorized Agent Bank (AAB) under an Escrow Agreement between the concerned Revenue District Officer, the Seller and the Transferee, and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such Transferor upon certification by the said RDO that the proceeds of the sale/disposition thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferor's new principal residence within eighteen (18) calendar months from date of the said sale or disposition . . . ." (underscoring supplied) Based on the above-quoted provision, it is clear that the sale of the old principal residence must have preceded the acquisition of a new principal residence for the exemption to apply. ( BIR Ruling No. 345-2013 dated September 9, 2013 ) In this case, documents show that the acquisition of a Townhouse unit in 1318 Agoncillo St., Ermita, Manila was made prior to the execution of the Deed of Absolute Sale over the old principal residence (condominium unit at Phoenix Heights Condominium) on March 7, 2012. Considering that the new principal residence had been acquired prior to the sale of the old principal residence, logically, there are no "proceeds of the sale" to speak of that could be utilized in the acquisition of a new principal residence. Furthermore, it is required under RR 2-98 that the amount representing the 6% CGT must be deposited under an Escrow Agreement between the concerned Revenue District Officer, the Seller and the Transferee, and the authorized agent bank (AAB) to the effect that the amount so deposited, including its interest yield, shall only be released to such Transferor upon certification by the said RDO that the proceeds of the sale/disposition thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferor's new principal residence within eighteen (18) calendar months from date of the said sale or disposition. This requirement was not complied with by the parties. In view of the foregoing, the transaction does not fall within the circumstances contemplated by Section 24 (D) (2) of the 1997 Tax Code, as amended. Accordingly, the sale of the condominium unit and all improvements found therein is subject to CGT and DST as imposed under Sections 24 (D) (1) and 196 of the 1997 Tax Code, as amended. The request for refund of the CGT paid on the transfer of the subject condominium unit is hereby denied for lack of factual and legal basis. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue