BIR Ruling No. 345-13

September 9, 2013 BIR RULING NO. 345-13 Sec. 24 (D) (2); BIR Ruling No. 035-10 Gerardo R. Florendo Regional Director Revenue Region No. 5 Caloocan City Sir : This refers to your indorsement dated March 25, 2013 forwarding the request of OIC-Revenue District Officer Bonifacio L. Caringal for opinion whether the sale of the principal residence by Spouses Salvador B. Adriano and Mariquita O. Adriano located in 43 Dunwoody St. University Hills Subd. Potrero, Malabon City is exempt from capital gains tax pursuant to Section 24 (D) (2) of the Tax Code, as amended. Documents submitted show that Salvador B. Adriano (married to Mariquita O. Adriano) and Martin B. Adriano (married to Lourdes Diane T. Adriano) are the absolute and registered owners of a parcel of land with buildings and improvements thereon covered by Transfer Certificate of Title (TCT) No. M-45017; that on January 14, 2010 Spouses Salvador B. Adriano and Mariquita O. Adriano bought a residential lot at South Forbes, Silang Cavite from Cathay Land, Inc.; that the said Spouses secured a building permit from the Office of the Municipal Engineer of Silang, Cavite to construct a residential house on the said lot, the proposed date of construction is in December 2011 and the expected date of completion is in April 2012; and that on February 14, 2012, the said Spouses Salvador B. Adriano and Mariquita O. Adriano sold their residence covered by TCT No. M-45017 to Antonio Bautista Legarda Jr. You now request for an opinion whether the sale of the principal residence of the Adrianos (Salvador B. Adriano and Mariquita O. Adriano) is exempt from capital gains tax because the proceeds of which, will be applied to the purchase of residential lot and construction materials for the Adriano's new residence at South Forbes, Silang, Cavite. In reply, please be informed that the sale of a principal residence by a natural person may be exempted from capital gains tax under Section 24 (D) (2) of the National Internal Revenue Code (NIRC), provided that the requirements under the said law as implemented by Revenue Regulations (RR) No. 13-99, as amended by RR No. 14-2000, have been complied with. (BIR Ruling No. 035-10 dated August 27, 2010) Sec. 2.57.1. (A) of Revenue Regulations (RR) No. 2-98, as amended, implementing Section 24 (D) (2) of the Tax Code of 1997, as amended, provides as follows: AHcaDC "In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from the agreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or manager's check in interest-bearing account with an Authorized Agent Bank (AAB) under an Escrow Agreement between the concerned Revenue District Officer, the Seller and the Transferee, and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such Transferor upon certification by the said RDO that the proceeds of the sale/disposition thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferor's new principal residence within eighteen (18) calendar months from date of the said sale or disposition , . . ." (underscoring supplied) Based on the above-quoted provision, it is clear that the sale of the old principal residence must have preceded the acquisition of a new principal residence for the exemption to apply. In this case, documents show that the acquisition of residential lot at South Forbes, Silang Cavite from Cathay Land, Inc. was made on January 14, 2010, prior to the execution of the Deed of Absolute Sale over the old principal residence (TCT M-45017) on February 14, 2012. Considering that the proposed new principal residence had been acquired prior to the sale of the old principal residence, logically, there are no "proceeds of the sale" to speak of that could be utilized in the acquisition of a new principal residence. Furthermore, it is disclosed that the subject residential property is co-owned by Salvador B. Adriano and Martin B. Adriano. It appears on the Deed of Absolute Sale that Salvador B. Adriano and his wife, Mariquita O. Adriano, actually resides at No. 43 Dunwoody St., University Hills Subd., Malabon City and that Martin B. Adriano and his wife, Lourdes Diane T. Adriano, are residents of Garden Unit C. Olympic Heights Condominium Tower 2, Eastwood City, Libis Quezon City. This shows that the subject property is not the principal residence of both co-owners. Also notable is that while both co-owners are disposing the subject property, only Salvador B. Adriano is acquiring a new residence. In view of the foregoing, the transaction does not fall within the circumstances contemplated by Section 24 (D) (2) of the Tax Code of 1997, as amended. The request for exemption from capital gains tax on the sale of the residential property covered by TCT No. M-45017 to Antonio B. Legarda, Jr., cannot be granted for lack of factual and legal basis. Therefore, the sale of the residential lot and all improvements found therein is subject to capital gains and documentary stamp taxes as imposed under Sections 24 (D) (1) and 196 of the Tax Code of 1997, as amended. This ruling is being issued on the basis of the foregoing facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue