Request for Tax Exemption on Reconveyance by Buyers Whose Properties Were Mortgaged to NHMFC and HDMF-Pag-ibig

June 23, 1998 BIR RULING NO. 096-98 24 (D) (1)-000-00-096-98 Borland Development Corporation 1039 Quirino Highway, Novaliches Quezon City Attention: Mr . Pablito R . Chua Gentlemen : This refers to your letter dated November 25, 1997 requesting for exemption from the payment of capital gains tax and documentary stamp tax on the reconveyance by the delinquent borrowers/buyers in your favor of the houses and lots which you previously sold in their favor and are mortgaged to the NHMFC and HDMF-Pag-ibig. It is represented that under a Funding Commitment Agreement between HDMF and the Developer, the former commits to fund residential loan application that the latter will deliver in accordance with the PAG-IBIG Expanded Housing Loan Program Guidelines; that under the agreement, HDMF has a right of recourse against the Developer for breach of warranties with respect to residential loan application or for violation of laws, rules and regulations, terms or conditions among which is the buy-back of accounts, in cases of default in payment of amortization within two (2) years from your "take-out"; that under this recourse, the Developer shall buy-back the mortgaged properties (house and lot) and pay the outstanding principal balance of the loan plus interest, reckoned from the last rates prevailing at the time of buy-back plus 2% or 12% on the other charges; that failure to pay such amount due, within 15 days from demand, shall subject the Developer 1/20th of 1% of the amount due per day of delay; that the Developer's commitment line with HDMF shall be suspended if the Developer's collection efficiency of accounts taken out for the preceding six month period falls below its desired collection efficiency level; that these are some of the recourse the HDMF will have against the Developer; that it is a compulsory condition on the Developer to buy-back delinquent mortgage of the borrowers; that however, when the unit is offered again for resale, the price of the property is still limited to the price ceiling scheme of BP 220 as implemented by the Housing and Land Regulatory Board, even if the developer has incurred additional cost for repair, renovation or making improvement to these properties subject of buy-back; and that at present, the properties which have mortgages as collateral for the loan are located in the following projects, viz: 1. Estrella Homes I Zabarte Rd. Novaliches Quezon City 2. Estrella Homes II Brgy. Llano, Novaliches Quezon City 3. Celina Homes Brgy. Camarin, Novaliches Quezon City In reply, please be informed that under then Section 21(e) of the Tax Code, as amended [now Section 24(D)(1) of the Tax Code of 1997], 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% (now 6%) based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. From the foregoing provision, it is clear that in cases of sale, exchange or other disposition of realty classified as capital assets including conditional sales thereof by individuals, the seller/transferor shall be liable to pay the 5% or 6% capital gains tax, as the case may be, based on the gross selling price or the fair market value (zonal value) prevailing at the time of sale. In the instant case, should you as the Developer be required to buy-back the mortgaged properties of delinquent individual borrowers/buyers who defaulted in the payment of their amortization within two (2) years from your "take-out", the liability to pay the 5% or 6% capital gains tax, as the case may be, imposed under then Section 21(e) of the Tax Code, as amended [now Section 24(D)(1) of the Tax Code of 1997], and the documentary stamp tax prescribed under then Section 196 of the same Code, on the said reconveyance shall rest upon the seller (the delinquent individual borrowers/buyers). In other words, in case you buy-back the mortgaged properties of individual delinquent borrowers/buyers, you, the Developer and as buyer thereof is not liable to pay the aforesaid taxes due on said reconveyance. But rather the seller, i.e., the individual delinquent borrower this time. LLcd 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.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue