Payment of Capital Gains Tax and Documentary Stamp Tax on Foreclosed Property

December 28, 1987 BIR RULING NO. 425-87 21 (e) 000-00 425-87 Gentlemen : This refers to your letter dated September 10, 1987 requesting reconsideration of BIR Ruling No. 21(e)-138-87-223-87 dated August 3, 1987 to the effect that the payment of the capital gains and the documentary stamp taxes shall be made after the foreclosure sale but before the registration of the certificate of sale issued by the auctioneer conducting the foreclosure sale. It appears that you are a government-owned and controlled corporation mandated to insure Pag-ibig loans, that in the consolidation of title of mortgaged properties you have purchased in foreclosure sales, you have been paying the capital gains tax and the documentary stamp tax after the registration of the certificate of sale but before consolidation of title; and that while you will not refuse to pay said taxes, you, however, strongly feel that said taxes should be paid only upon the consolidation of the title and not on or before the registration of the sheriff's certificate of sale. In reply, I have the honor to inform you that a mortgage foreclosure sale is a form of conditional sale transaction (Revenue Memorandum Circular No. 41-86), and as such subject to redemption within a period of one year 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 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. 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. Moreover, on the premise that the amount representing the capital gains tax forms part or is tacked with the real property which is already under the control and custody of the financial institution like you, you as the mortgagee-transferee shall pay the 5% capital gains tax based on the selling price shown in the mortgage foreclosure sale and the corresponding documentary stamp tax based on the selling price shown in the mortgage foreclosure sale or fair market value of the real property, whichever is the higher amount. (Revenue Memorandum Order No. 29-86). In view thereof, your request is hereby denied. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner