Tax Consequence of the Acquisition of Parcels of Real Property by Way of Extra-Judicial Foreclosure

September 15, 1988 BIR RULING NO. 446-88 21 (e) 313-87 446-88 Gentlemen : This refers to your letter dated July 12, 1988 requesting in effect a ruling as to whether or not the various parcels of real property acquired by your Ligao (Albay) Branch by way of extra-judicial foreclosure of the mortgages executed over said properties in a public auction sale held sometime on January 2, 1986 is subject to capital gains tax; and whether or not RMO No. 16-88 is applicable to the said acquired properties. cdt It is represented that sometime on January 2, 1986, various parcels of real property were acquired by your PNB Ligao (Albay) Branch by way of extra-judicial foreclosure of the mortgages executed over said properties in a public auction sale; that upon request of the mortgagors, you did not consolidate title and ownership over the said parcels immediately upon the lapse of the period of redemption in order to allow the mortgagors ample opportunity to reacquire the same; that owing to the privatization thrust of the government and the inability of the mortgagors to redeem their respective properties, you were compelled to pursue consolidation proceedings; and that you were hindered from pursuing the consolidation due to the interpretation of the Revenue District Officer of Legaspi City of your alleged tax liability under Revenue Memorandum Order No. 16-88 dated April 18, 1988. In reply, please be informed that RMO No. 33-81 as amended by RMO No. 18-82 allowed the assurance of a certificate authorizing the transfer of title to real property classified as capital asset even before payment of the capital gains tax if foreclosed by a bank, finance or insurance company thru a foreclosure sale. However, RMO No. 29-86 dated September 3, 1986 which revoked RMO No. 33-81 as amended by RMO No. 18-82 provides that no certificate authorizing transfer of title to real property classified as capital asset sold by an individual thru foreclosure sale shall be issued without prepayment of the capital gains tax including the documentary stamp tax. Considering, however, that RMO No. 29-86 applies to real property purchased by a bank, finance and insurance company thru mortgage foreclosure sale on or after September 3, 1986 and since the mortgage foreclosure sale in this case was held on January 2, 1986 or prior to September 3, 1986, a certificate authorizing the transfer of the title of the aforementioned properties may be issued to you before payment of the capital gains tax. Moreover, while title to the aforesaid foreclosed properties can be consolidated in your favor without the prepayment of the capital gains tax prescribed by Section 21(e) of the Tax Code, as amended, said tax shall nevertheless be paid and collected from the debtor-mortgagors by the Revenue District Officer of the place where such debtor-mortgagors have their legal residence or principal place of business who shall, for this purpose, conduct the necessary investigation to ascertain the capital gains tax due form the debtor-mortgagors in accordance with the procedure prescribed by Revenue Memorandum Order No. 21-80 dated May 28, 1980. (RMO No. 33-81 as amended by the RMO No. 18-82) Furthermore, the Sheriff's Deed of Sale is subject to documentary stamp tax based on the selling price shown on said Deed pursuant to then Section 209 (now Section 196) of the Tax Code. (BIR Ruling No. 313-87) Finally, RMO No. 16-88 dated April 1988 amending RMO No. 29-86 applies only to real property classified as capital asset purchased by a bank, finance and insurance company thru mortgage foreclosure sale on or after April 18, 1988. In other words, said RMO is applied prospectively. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner