Capital Gains Tax on a Sale Transaction to a Government Agency of a Private Landowner

July 26, 1988 BIR RULING NO. 354-88 21 (e) 000-00 354-88 M a d a m : This refers to your letter dated May 12, 1987 requesting the legal opinion of this Office on whether a private landowner is subject to capital gains tax on a sale transaction to a government agency. cdtech It is represented that a certain Ms. Nicanora Santos is the owner of a piece of property located within the Zonal Improvement Program (ZIP) and which is now the subject of a government offer to purchase otherwise, it would proceed to expropriate the same; that while Ms. Santos is willing to sell her property, that issue arises whether she is subject to capital gains tax considering that the government's proposed purchase price is about fifty per cent (50%) less than the market price, i.e., P310.00 per square meter instead of a possible P550.00 with private buyers; and that while she stands to gain from the increment over the original value when she acquired the property, she actually stands to lose because of the impossibility of imposing the market price on the government agency concerned which threatens to expropriate if she does not sell according to its terms. The provisions of law involved in this case are Sections 21(a) and (e) of the Tax Code, as amended by Executive Order No. 47 which provide: "Sec. 21. Tax on Citizens or Residents . (a) Taxable compensation, business and other income . A tax is hereby imposed upon the taxable compensation, business and other income as defined in Section 28, other than the income subject to tax under paragraphs (b), (c), (d) and (e) of this Section, received during each taxable year from all sources." In the case of married individuals, the husband and wife, subject to the provisions of Section 45(d) hereof, may elect to compute separately their individual income tax based on their respective total taxable incomes: Provided, that if any income can not be definitely attributable to or identifiable as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of computing their respective taxable income." "(e) Capital gains from sales of real property . The provisions of Section 34(b) notwithstanding, 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 of conditional sales, by individuals, including estates and trusts, 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: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 21(a) or under this sub-section, at the option of the taxpayer." In reply, please be informed that, if Mrs. Nicanora Santos disposes of her real property, whether by accepting the government offer to purchase or by government expropriations, she will be subject to income tax. Her tax liability on said disposition of real property shall nevertheless, be determined either under Sections 21(a) or 21(e) of the Tax Code, above-quoted, at her option. In case Ms. Nicanora Santos elects Section 21(a), this Office shall issue the certification authorizing the transfer of title to the purchaser. (BIR Ruling No. 082-87) On the other hand, in case Ms. Nicanora Santos elects Section 21(e), she shall be subject to the 5% capital gains tax based on the market price (fair market value) since this is higher than the gross selling price. A capital gains tax return shall be filed within 30 days from the date of sale and the tax shall be paid on the same date the return is filed. [Sec. 45(c)(ii) and Sec. 50(a)(4), Tax Code] However, if the Deed of Sale stipulates that payment to the seller will not be made until new certificate of Title is submitted in the name of the government agency, this Office hereby allows the registration of the Deed of Sale with the Register of Deeds and, consequently, the transfer of the property in favor of the government. Thereafter, upon submission of a new Certificate of Title in the name of the government at which time, payment of the property sold can be effected Ms. Nicanora Santos shall file the corresponding capital gains tax return within thirty (30) days from said submission of the Certificate of Title. The government agency concerned shall within the same period withhold the capital gains tax due from Ms. Nicanora Santos and remit the same to this Bureau. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner