Transfer of Rights over Real Property Not Subject to Capital Gains Tax

June 22, 1999 BIR RULING NO. 083-99 24 (D) (1) 000-00 083-99 Ms. Flora N. Castillo #4 Sampaguita Avenue Mapayapa Village 2 Capitol District, Quezon City M a d a m : This refers to your letter dated November 5, 1998 stating that some eight (8) years ago, as a broker, you sold a parcel of land on installment under a Contract to Sell to a certain buyer. That the said buyers manifested to the seller's officer-in-charge of Sale that said purchase was for his daughter, then a minor; that said buyer would transfer his rights under the said Contract to Sell to his daughter once the latter becomes of legal age; that sometime in March, 1998, the buyer, thinking that it would be easier to effect the intended transfer of rights if he pays in full, did pay the outstanding balance on the lot and that buyer eventually executed a contract entitled "Deed of Assignment and Transfer" in favor of his daughter (now of legal age) but the seller did not grant its conformity to the transfer on the ground that the said lot is already fully paid though still under the existing Contract to Sell. Based on the foregoing representations and documents submitted, you are now requesting for a ruling on the following queries: "1) Did the buyer lose his right to transfer his rights on the said contract for having fully paid the balance of the lot/account? "2) Can the seller refuse the buyer the Seller's Conformity to the transfer on the ground that the buyer has fully paid the account? "3) Will there be a capital gains tax due on the said assignment and transfer of rights?" In reply, please be informed that your above-quoted queries are answered as follows. dctai 1.) Your first query is answered in the negative. In the instant case, by paying the lot or his account in full, title to the said property could not be said to have been factually transferred to the buyer, as there still remains the following acts to be done: 1) the execution by the seller of the Deed of Absolute Sale transferring the title to the property bought in favor of the buyer; 2) after which, the corresponding taxes due (creditable withholding tax, VAT and documentary stamp tax) will have to be paid by the seller thereof; 3) followed by the issuance by the Revenue District Officer concerned of a Certification Authorizing Registration of the property bought; and 4) finally the issuance of a Transfer Certificate of Title in the name of the buyer by the Register of Deeds concerned. Accordingly, the buyer did not lose his right to transfer his right to the lot by the mere fact of paying the property in full considering that title to the said property as of that point in time still remains in the name of the seller. 2) It appears that your second query does not involve any tax issue, hence, it is suggested that you seek the services of a lawyer for the purpose. 3) Your third query is likewise answered in the negative. Under Section 24(D)(1) of the Tax Code of 1997, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the said Code, whichever is higher, is imposed upon 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 conditional sales by individuals including estates and trusts. From the foregoing provision of Section 24(D)(1) of the Tax Code of 1997, it is clear that the sale of rights over realty although classified as real property under the Civil Code, is not the realty contemplated on the said Section considering that to be subject to the capital gains tax imposed under Section 24(D)(1) of the Tax code of 1997, the realty in question must be located in the Philippines while right over real property may or may not be located in the Philippines since such kind of realty follows the owner thereof who may or may not be in the Philippines. Such being the case, this Office is of the opinion as it hereby holds that transfer of rights over realty, as in this case, is not subject to the capital gains tax. Thus, the sale of rights over real property, as in this case, what is actually being sold is the right which the seller has over the said realty, so much so that whomsoever, buys the said rights merely steps into the shoes of the seller and acquires whatever right he may have over the realty concerned, but title thereto, remains with the seller (realty company). 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue