Payment of Capital Gains Tax on Property Acquired in an Auction Sale

June 13, 1988 BIR RULING NO. 257-88 21 (e) 212-88 257-88 Gentlemen : This refers to your letter dated February 9, 1988 requesting advise from this Office relative to the payment of capital gains tax on the property you acquired in an auction sale. cdta It is represented that in connection with Civil Case No. 7162 re: Construction and Development Corporation of the Philippines versus Salvador Peaflor, Eunice Panesares and Emelita D. Alimbuyog, and Alias Writ of Execution was issued by Honorable Benito C. Se, RTC, Branch 9, Legaspi City on March 11, 1987, whereby the Regional Trial Court, Provincial Sheriff to Albay, Legaspi City or his lawful deputies were commanded to cause the said defendant-mortgagors to pay you as the plaintiff-mortgagee the following: (1) P519,410.50 as principal obligation; (2) sixteen (16%) per cent of the principal obligation as interest computed from July 8, 1981 until the entire sum is fully paid; (3) two (2%) per cent of the principal obligation as service fee (4) five (5%) per cent of the total indebtedness as attorney's fee; and (5) to pay the cost of the suit; that on May 4, 1987, the Ex-oficio Provincial Sheriff of Albay, Legaspi City sold at public auction the mortgage real property of the defendant-mortgagors covered by TCT No. T-56699 to you as sole bidder in the amount of P183,870.00; that as a consequence, BIR, Legaspi City advised you that the capital gains tax and the corresponding documentary stamp tax must be computed on the basis of the original loan consideration of P519,410.50; and that it is your contention that the capital gains tax and the corresponding documentary stamp tax should be computed on the basis of the amount of the consideration of the auction sale which is P183,870.00. In reply, please be informed that under Section 21(e) of the Tax Code, as amended, 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 or conditional sales, by individual, including estate and trust, 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 the instant case, when you acquired the real property thru a mortgage foreclosure, the bid price of P183,870.00 as shown in the Sheriff's Certificate of Sale shall be considered as the gross selling price. The amount of loan secured by the mortgage is not considered as basis in computing the tax. (BIR Ruling No. 406-87) On the other hand, since the Sheriff's sale took place on May 4, 1987, the fair market value of the property in question shall be determined according to its zonal value as provided in Revenue Audit Memorandum Order No. 3-86 dated May 19, 1986, as amended by Revenue Audit Memorandum Order No. 3-86A dated June 10, 1986. In other words, the 5% capital gains tax shall be based on the bid price of P183,870.00 or on the aforesaid zonal value, whichever is higher. (BIR Ruling No. 212-88) As regards the documentary stamp tax due on the mortgage foreclosure sale, the same shall be based on the bid price of P183,870.00. (BIR Ruling No. 212-88) cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner