When Capital Gains Tax is Payable by the Debtor-Mortgagor

November 5, 1987 BIR RULING NO. 346-87 21 (e) 000-00 346-87 S i r : This refers to your letter dated July 8, 1987 stating that on August 29, 1983, Ms. Eufracia C. Infante mortgaged her real property in favor of Edward Keller (Philippines), Inc. (mortgagee) as security for a joint and solidary liability of P100,000.00 she assumed with Rejoice Marketing which is the debtor of the mortgagee, in connection with a Dealership Agreement executed by and between Rejoice Marketing and the mortgagee; and that on September 26, 1984 the mortgage was foreclosed and the real property was sold at public auction in favor of the mortgagee for P100,000.00; that on October 4, 1984 and within the redemption period, the mortgagee sold its mortgage right and interest over the said property in favor of Mr. Antonio Pedro for P100,000.00; that on October 12, 1984, also within the redemption period, Mr. Antonio Pedro, mortgaged the same property to the mortgagee; that the right of redemption of Ms. Eufracia C. Infante expired on October 10, 1985; and that on April 9, 1986, Mr. Antonio Pedro executed an affidavit of Consolidation of Ownership. In connection therewith, you now request a ruling to the effect that Mr. Antonio G. Pedro and Ms. Eufracia C. Infante are exempt from capital gains tax, and that the sale in favor of Edward Keller (Philippines), Inc. is not subject to the documentary stamp tax. In reply, please be informed that capital gains tax is payable by Ms. Eufracia C. Infante, the debtor-mortgagor, if she realized a taxable income on account of her disposition of the capital asset. The income is realized if the proceeds of the loan, exceed the cost of the property mortgaged (Revenue Memorandum Order No. 33-81). Accordingly, before the issuance by the Revenue District Officer of Bulacan of a certification authorizing transfer of title over the property, the capital gains tax imposed by Section 34(h) of the Tax Code as amended by Batas Pambansa Blg. 37, before its amendment by P.D. No. 1994 should be paid. Moreover, the sheriff's Deed of Sale is subject to documentary stamp tax pursuant to Section 209 of the Tax Code. The sale by Edward Keller (Philippines), Inc. of its mortgaged the same property to the mortgagee; that the right of Antonio Pedro is not subject to the capital gains tax. Likewise Mr. Antonio Pedro being the vendee of the mortgage right and interest and later on as owner due to the consolidation of his title to the property is not subject to the capital gains tax. Finally, the mortgage by Ms. Eufracia C. Infante of her property to Edward Keller (Philippines), Inc., as well as the subsequent mortgage of the same property by Mr. Antonio Pedro to the same mortgagee are subject to documentary stamp tax, pursuant to Section 208 of the Tax Code, as amended. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner