Gain Derived from Sale of Agricultural Land Not Subject to Final Capital Gains Tax but to Income Tax

September 29, 1986 BIR RULING NO. 196-86 34-h 202-83 196-86 S i r : This refers to your letter dated February 29, 1984 stating that on January 31, 1984, you and your father-in-law bought an agricultural land in Bugallon, Pangasinan, twelve hectares of which are commercial fishpond and about seven (7) hectares, planted to mango trees and cash crops such as peanuts, corn and a little rice; that prior to the sale on October 1, 1983, the fishpond part of the property was leased to you for five (5) years at forty thousand (P40,000) pesos per annum, that the lease agreement included a provision for an option to purchase the entire property, which option was to expire January 31, 1984; that the option provided that should the sale be consummated, the unexpired portion of the lease consideration shall be considered as part of the selling price of the total property, and that the lease agreement provides that the buyer shall pay for the capital gains tax. Based of the foregoing facts, you now request a ruling as to whether or not the aforesaid sale transaction is subject to the payment of the capital gains tax. In reply thereto, I have the honor to inform you that the agricultural land purchased by you and your father-in-law is not a capital asset, the same having been used in the farming business of the seller. (Sec. 34(a)(1), Tax Code). Accordingly, the gain derived by the seller from the sale thereof is not subject to the then final capital gains tax prescribed by Section 34(h) of the Tax Code, as amended by Batas Pambansa Blg. 37 but to the ordinary income tax rates prescribed by Section 21(b) of the Tax Code, as amended by Batas Pambansa Blg. 135, which are the provisions of law in force at the time of the transaction. Accordingly, the Deed of Sale covering your said purchase may be registered with the Register of Deeds of Pangasinan without payment of the capital gains tax. cdtech Very truly yours, (SGD.) ROMULO M. VILLA Acting Commissioner