Tax Consequence of An Exchange Transaction

February 29, 1988 BIR RULING NO. 063-88 21 (e) 228-87 063-88 S i r : This refers to your letter dated February 11, 1988 requesting that the Deed of Exchange executed by your clients, spouses Dante and Rosie Noche and spouses Celso and Beatrice Legarda be exempt from the payment of capital gains tax. It is represented that spouses Dante B. Noche and Rosie R. Noche are the registered owners of a parcel of land situated in Paraaque, Metro Manila covered by TCT No. S-86777; that said parcel of land has a fair market value of P84,600.00; that the spouses Celso L. Legarda and Beatrice K. Legarda are the registered owners of a parcel of land situated in Paraaque, Metro Manila and covered by TCT No. 85929; that the said parcel of land has a fair market value of P88,500.00; that the spouses Noche has offered to swap and exchange their said property with that of the spouses Legarda for geographical purposes, it appearing that the spouses Legarda could maximize the lot of the spouses Noche by providing a bigger lawn or backyard space where the spouses Legarda could utilize for health reasons; and that on December 5, 1985, a Deed of Exchange was executed by the parties. In reply, please be informed that in BIR Ruling No. 250-82 dated September 29, 1982, this Office ruled that under Section 140 of Revenue Regulations No. 2 otherwise known as the Income Tax Regulations, for income to be realized in exchange of property, it is required that the property or interest in property received in exchange must be essentially different from the property or interest in property disposed of. This means that there must be a change in substance and not merely a change in form. Considering, that the parties to an exchange of real property will not get something fundamentally and essentially different from what they already had prior to the exchange, the parties are not subject to income tax as a result of the said transaction. However, while the provision of Section 140 of Revenue Regulations No. 2 had been copied from the U.S. Income Tax Regulations, the corresponding statutory provision which it is supposed to implement does not exist in our tax laws then, in which case, the aforementioned ruling was abandoned by this Office in BIR Ruling No. 125-85 dated August 12, 1985 where this Office ruled that the net capital gains tax realized from the sale, exchange or other disposition of real property by a citizen of the Philippines or resident alien individuals shall be subject to final income tax at the rates prescribed by then Section 34(h) of the Tax Code, as amended by Batas Pambansa Blg. 37, and implemented by Revenue Regulations No. 8-79. Considering that the exchange transaction in this case took place on December 5, 1985 or after BIR Ruling No. 125-85 dated August 12, 1985, said BIR Ruling then becomes the controlling rule and should be given prospective application. Accordingly, the spouses Celso and Beatrice Legarda is subject to 10% capital gains tax imposed by then Section 34(h) of the Tax Code, as amended by Batas Pambansa Blg. 37 on their income of P3,900.00 realized on account of the exchange of their property with the property of the spouses Dante and Rosie Noche. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner