Tax Consequence of a Reconveyance of a Real Property

July 6, 1988 BIR RULING NO. 298-88 21 (e) 000-00 298-88 Gentlemen : This refers to your letter dated November 19, 1987 stating that on July 14, 1977, Mrs. Laura Navarro bought a house and lot from you which was paid through a real estate mortgage loan secured by her from Banco Filipino; that the balance of the purchase price was financed by you as evidenced by a second mortgage in your favor; and that Mrs. Navarro failed to pay you and Banco Filipino; and that because of her failure to pay you, she reconveyed the real property to you. In connection therewith, you now posed the following questions: "1. Is the Deed of Reconveyance subject to capital gains tax? "2. Is the Deed of Reconveyance a taxable documents?" In reply, please be informed that under Section 21(e) of the Tax Code, as amended by Executive Order No. 37, capital gains presumed to have 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 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. This includes Deed of Reconveyance with Assumption of Mortgage. In other words, in the instant case, the 5% capital gains tax which is payable by Mrs. Laura Navarro, is based on the gross selling price as shown in the Deed of Reconveyance with Assumption of Mortgage or the fair market value of the property, whichever is higher. Moreover, BIR Clearance is required before said property can be transferred to you, pursuant to Section 50(a)(4) of the Tax Code, as amended by Executive Order No. 37 reading as follows: "No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner of Internal Revenue or his duly authorized representative has certified that such transfer has been reported and the tax herein imposed, if any, has been paid." Furthermore, as regards the documentary stamp tax due on the Deed of Reconveyance with Assumption of Mortgage, a deed of Conveyance is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for the land "after making proper allowance for any encumbrance" thereon. Said encumbrance means encumbrance existing before the sale and is deductible from the consideration before computing the documentary stamp tax due thereon. (Sec. 209 renumbered as Section 196 of Executive Order No. 273, Tax Code). Accordingly, the mortgage with Banco Filipino which is a pre-existing encumbrance is deductible from the consideration before computing the documentary stamp tax due on the said Deed of Reconveyance with Assumption of Mortgage. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner