Distinction Between a Sale of Real Property on the Installment Plan and a Sale on a Deferred-Payment Basis

September 16, 1988 BIR RULING NO. 453-88 42 (b) 74-007 453-88 Gentlemen : This refers to your letter dated August 29, 1988 stating as follows: "Prior to the execution of the Contract to Sell in (sic) October 10, 1972, option moneys were paid by the Doa Juliana Gabriel Tenant Association all in the total sum of P220,840.48 or equivalent to 39.8% ernest (sic) money, received and paid to Doa Juliana de Gabriel during her lifetime. Doa Juliana died on April 1979. Testate estate proceedings filed before the Probate Court of Manila; all estate taxes paid clearance already issued by the Bureau of Internal Revenue. Upon full payment of purchase cost of the lot, an order was issued directing the Special Administrator to execute the corresponding Deed of Sale. The sale was executed as per order of the Court on April 29, 1988 in favor of the tenants." cdtech In connection therewith, you now request in effect a ruling as to whether or not the sale is considered a cash sale for purposes of paying the documentary stamp tax. In reply, please be informed in the affirmative. Section 42(b) of the Tax Code, as amended, provides, viz: "Sec. 42. Installment Basis . (a) xxx xxx xxx "(b) Sales of realty and casual sales of personalty. In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, for a price exceeding one thousand pesos, or (2) of a sale or other disposition of real property, if in either case the initial payment do not exceed twenty-five percent of the selling price, the income may under regulations prescribed by the Secretary of Finance, be returned on the basis and in the manner above prescribed in this section. As used in this section the term "initial payments" means the payments received in cash or property other than evidence of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made." Generally, income from the sale of real property may be reported either on the installment basis or on the deferred payment basis, not on the installment plan. The basic distinction between a sale of real property on the installment plan and a sale on a deferred-payment basis, not on the installment plan, lies on the amount of "initial payments" received by the seller. The sale is on the installment plan if the initial payment in the year of sale does not exceed twenty-five percent (25%) of the selling price. If the initial payments in the year of sale exceed twenty-five percent (25%) of the selling price, then the sale is on the deferred-payment basis, not on the installment plan. (Sec. 175, Revenue Regulations No. 2) The term "initial payments" is defined to mean payments received in cash or property other than evidence of indebtedness of the purchaser during the taxable year in which the sale or other disposition is made. This term must not be equated with what is commonly called "down payment" because its meaning is much broader than that, while it covers any down payment made, it goes further and includes all payments actually or constructively received during the year of sale. (Gertrude H. Sweet, 8 BTA 404; Cartland Specialty Co., 22 BTA 808) And the aggregate of all such payments determines whether or not the limit which the law has set has been exceed. (See BIR Ruling No. 70-034 dated June 29, 1970) In the instant case, the aggregate initial payments on the Contract to Sell in the year of sale is in excess of 25% or the equivalent of 39.8% of the total consideration of P554,697.00. Accordingly, the Contract to Sell is on a deferred payment basis, in which case, "the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash." (Sec. 177, Revenue Regulations No. 2) Such being the case, said transactions which involves sale of real property executed on October 10, 1972 being considered on a cash basis is subject to the documentary stamp tax based on the total consideration of P554,697.00 at the rates then in force, i.e., P0.75 if the consideration exceeds P200 but does not exceed P1,000 and P3.00 for each additional P1,000 or fractional part thereof in excess of P1,000 of such consideration, pursuant to then Section 233 of the Tax Code. (BIR Ruling No. 227-88) The Deed of Absolute Sale executed on May 30, 1988 pursuant to an order of the Court is subject only to the documentary stamp tax on certificates in the amount of P3.00, pursuant to Section 188 of the Tax Code, as amended by Executive Order No. 273. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner