Capital Gains Tax and Donor's Tax on Donation of Road Lots by Private Landowners to the Government

July 1, 1987 BIR RULING NO. 187-87 21 (e) 000-00 187-87 Gentlemen : This refers to your letter dated May 14, 1987 stating that you are currently pursuing the acquisition of lands in identified slum areas in Metro Manila for development under the Zonal Improvement Program (ZIP), that the intention of the program is to introduce basic infrastructure in those areas and resolve the land tenure problem by awarding the lots to bona fide occupants who are mostly marginal income families, that negotiations with the private land owners concerned tend to indicate that you will be able to acquire most of the needed lands at cost lower than the assessed market value, and that certain road lots of old subdivisions within the scope of the areas for acquisition which were not implemented and are still titled under the owner's name will be conveyed to you by way of donation, provided that: a. the capital gains tax will be computed on the basis of the actual amount of the purchase; b. no donor's tax will be imposed on the price difference; and c. no donor's tax will be imposed on the donations of road lots. In reply, please be informed as follows: (1) Under Section 21(e) of the Tax Code, as amended by Executive Order No. 37, capital gains presumed to have been realized from 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. In other words, the capital gains tax will be based on the actual amount of the purchase (gross selling price) if it exceeds the fair market value prevailing at the time of sale . The following rules shall be applied in the determination of the fair market value of the real property: (a) In general, the fair market value of the real property (land and/or improvement) per its latest tax declaration filed in the Provincial/City Assessor's Office, shall be increased by 10% thereof, to cover inflationary value; (b) If the real property is located in a developed village/subdivision within the jurisdiction of Revenue Regional Office No. 4-B, the same shall be increased by 50%; and (c) If the real property is classified in the tax declaration as a commercial or industrial property, the same shall be increased by 50% regardless of regional location. (Revenue Audit Memorandum Order No. 3-87 dated June 3, 1987) (2) Sale, exchange or disposition of real property which is subject to capital gains tax imposed under Section 21(e) of the Tax Code is not subject to the donor's gift tax (Sec. 103, Tax Code, as amended by Executive Order No. 37). iatdc (3) Since the donation of the road lots is being made to or for the use of the government, the same is not subject to donor's gift tax pursuant to Section 104 of the Tax Code, as amended. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner