Gains Derived From the Sale of Subdivision Lots are Subject to the Ordinary Income Tax Rates

December 23, 1987 BIR RULING NO. 416-87 21 (e) 000-00 416-87 Gentlemen : This refers to your letter dated October 22, 1986 requesting exemption from the requirement of the 30 days period within which to present the Certificate of Sale and to pay the 5% capital gains tax and documentary stamp tax. It is represented that you are a government-owned and controlled corporation involved in the shelter program of the government; that you were created under R.A. No. 580 as amended, among others, to operate a mortgage insurance program; that in the course of performing these functions, several real estate collaterals were assigned to you pursuant to your Charter and accordingly were foreclosed; and that if you pay the 5% capital gains tax and documentary stamp tax, it is an unnecessary burden on the owner once he redeems the property within the one year period. In reply, please be informed that your request cannot be granted for lack of legal basis. A mortgage foreclosure sale is a form of a conditional sale transaction. (Revenue Memorandum Circular No. 41-86) As such, it is subject to redemption within the one-year period of redemption reckoned from the date of registration of the sale. Under Section 21(e) of the Tax Code, as amended by Executive Order No. 37, 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 estate 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. Accordingly, the 5% capital gains tax and the corresponding documentary stamp tax becomes due after the mortgage foreclosure sale but before the registration of the Certificate of sale issued by the auctioneer conducting the foreclosure sale (BIR Ruling 223-87). Finally, the return from the sale or disposition of real property under Section 21(e) of the Tax Code, as amended, shall be filed within 30 days following each sale or other disposition. (Section 45 (c)(2)(ii), Tax Code, as amended by Executive Order No. 37). Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner