Correct Basis for Computing the Capital Gains Tax and Documentary Stamp Tax on Sale of Real Property

September 28, 1994 BIR RULING NO. 145-94 21 (e) 196 000-00 145-94 Atty. Edmundo O. Reyes Capri Condominiums Km. 21, West Service Road Alabang, Muntinlupa Metro Manila S i r : This refers to your letter dated July 21, 1994 requesting a ruling on the correct basis of computing the capital gains tax and documentary stamp tax on sale of real property. It is represented that last July 8, 1994, your father-in-law, Atty. Luis F. Sison, bought a residential house and lot in Baguio City from a certain Fernando P. Cabato; that among the terms of the contract was the provision that the buyer would pay the capital gains tax and documentary stamp tax; that immediately after the execution of the contract; you proceeded to the Revenue District Office of Baguio City (RDO of Baguio) to pay the said taxes; that the said RDO computed the tax base as follows: First: The RDO computed for three (3) values as reflected in Assessment No. 0401-94. 1. Selling Price P1,000,000.00 2. Land (1,075 sq.m.) Zonal Value : P800.00 per sq.m. P 800.00 x 1,075 = P860,000.00 Add: Adjusted Value of Improvement based or residential use (Adjusted fair market value per Tax Declaration P493,690.00) P 493,690.00 x 200% = P987,380.00 Total P1,847,380.00 =========== 3. Adjusted FMV of the land per Tax Declaration = P602,000.00 Adjusted Value based on residential use P 602,000.00 x 200% = 1,204,000.00 Add: Adjusted Value of improvement based on residential use P 493,690.00 x 200% = 987,380.00 P2,191,380.00 =========== Second: The RDO used as the basis for capital gains tax and documentary stamp tax, the value obtained by method No. 3 since this yielded the highest amount. According to the RDO, the above method is sanctioned by RAMO No. 2-91. that you vehemently protested the above method, contending that there was no need to use the value obtained by method No. 3 since the land had a BIR Zonal Valuation; that you argued that it is only in cases where there is no BIR zonal valuation for the land that the adjusted FMV of the land per tax declaration may be used to compute for the tax base; that you are of the opinion that the value obtained by method No. 2 is the correct base; that the RDO of Baguio did not agree with your opinion; that to avoid penalty, for late payment of the documentary stamp tax, you paid based on the above tax base No. 3; and that since you have thirty (30) days from July 8 until August 7, 1994 to pay for the capital gains tax, you decided to defer payment of the said tax and secure a ruling from this Office. In reply, please be informed that under Revenue Audit Memorandum Order No. 2-91 computations to determine the tax base for sales, transfers or any disposition of real property including improvements when the zonal value of land has been established shall be as follows: cdt a. Value of Improvement: 1) Total selling Price/ consideration Per Deed of Sale (Land & improvement) x x x Less: Zonal value of land x x x Value of Improvement x x x 2) Construction Cost Per Bldg. Permit and/or Occupancy Permit Plus 10% Thereof Per Year After Year of Construction; or Market Value Per Latest Tax Declaration Plus 100%/150% Thereof Market Value of Improvement x x x b. Determination of Tax Base: Zonal Value of Land x x x Add: Market Value of Improvement in 1.a.(1) or 1.a.(2), whichever is higher x x x Tax Base of Land and Improvement x x x ====== Such being the case, the computation of the tax base in accordance with method No. 2 by the RDO of Baguio is correct for purposes of the capital gains tax due on the said sale of realty in favor of your father-in-law. Moreover, under Revenue Memorandum Order (RMO) No. 41-91 in all cases involving sale, exchange, or any disposition of real property, the tax base for documentary stamp tax purposes shall be the same as the tax base used in the computation of the capital gains tax which means, gross selling price, fair market value, or zonal value of the real property, whichever is higher. In other words, the tax base for purposes of computing the documentary stamp tax due on the deed executed to effect the aforesaid sale of realty in favor of your father-in-law should be the same tax base obtained in computing the capital gains tax due on said sale, i.e., the computation used in method No. 2 by the RDO of Baguio. Hence, the tax base used in computing the documentary stamp tax prescribed in Section 196 of the Tax Code, as amended, on the aforesaid Deed of Absolute Sale executed in favor of your father-in-law should be recomputed by the RDO of Baguio using method No. 2 in order to obtain the correct tax base in computing the said tax. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue