Whether a Real Estate Mortgage Transaction Between the Mortgagor and the Mortgagee is Subject to Capital Gains Tax

March 2, 1994 BIR RULING NO. 067-94 21 (e) 006-92 067-94 Mr. Bernardo P. Benigno, Jr. c/o Sofronio C. Santos 48 Chico St. Phase 3-B Gatchalian Subdivision Las Pias, Metro Manila S i r : This refers to your letter dated September 6, 1993 requesting in effect for a ruling on whether or not a real estate mortgage transaction between the mortgagor and the mortgagee is subject to capital gains tax. cdti It is represented that BIR examiner, Atty. Bienvenido Bautista of Revenue Region IV, Baclaran Branch is requiring payment of capital gains tax on the real estate mortgage transaction between Lendcor Asia, Inc., mortgagee and Reynaldo E. Dikit, attorney-in-fact of Elisa S. Estores, mortgagor; that the said examiner is likewise requiring payment of capital gains tax on the extrajudicial foreclosure sale of the mortgaged real property covered by TCT No. (41093) T-22325-A held on March 31, 1993 wherein the said realty was sold for the sum of P345,000.00 to Mr. Sofronio C. Santos as highest bidder; and that as a consequence, Lendcor Asia, Inc., the mortgagee, contested the aforesaid imposition of capital gains tax on the ground that being the mortgagee, it conducted the foreclosure proceedings in order to recover the financial obligation of the mortgagor, and that the capital gains tax due should be collected from the mortgagor, Mr. Reynaldo Dikit and the highest bidder, Mr. Sofronio Santos. In reply, please be informed that under Section 21(e) of the Tax Code, as amended, 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. The phrase "including pacto de retro sales and other forms of conditional sales" necessarily includes mortgage sale under Act No. 3135 as amended by Act No. 4118 (Revenue Memorandum Order No. 29-86, as amended by Revenue Memorandum Order No. 6-92). However, considering that in the extra-judicial foreclosure sales under Act No. 3135 as amended by Act No. 4118, the creditor-financial institution (bank, finance and insurance companies) is the statutory seller, representing the owner-mortgagor of the real property, the said financial institution becomes liable for the payment of the capital gains tax due on such foreclosure sale based on the bid price in the auction sale. The bank, finance and insurance companies, however, may get a reimbursement or recover the capital gains tax paid, if the right of redemption is exercised by the debtor-mortgagor or when the property is sold to any party, whatsoever. (BIR Ruling No. 006-92) Such being the case, only the extra-judicial foreclosure sale held on March 31, 1993 relative to the Real Estate Mortgage executed by Reynaldo E. Dikit, as attorney-in-fact of Elisa S. Estores, mortgagor in favor of the mortgagee, Lendcor Asia, Inc., is subject to the 5% capital gains tax imposed under Section 21(e) of the Tax Code, as amended, based on the bid price of P345,000.00, which tax is due from Lendcor Asia, Inc. as the creditor-financial institution and statutory seller in the said mortgage foreclosure sale. Accordingly, the Real Estate Mortgage transaction between the Lendcor Asia, Inc., mortgagee and Reynaldo E. Dikit, attorney-in-fact of Elisa S. Estores, mortgagor is not subject to the capital gains tax prescribed under Section 21(e) of the Tax Code, as amended. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue