5% Capital Gains Tax Imposed on Capital Gains

October 4, 1988 BIR RULING NO. 475-88 21 (e) 000-00 475-88 Gentlemen : This refers to your letter dated June 28, 1988 stating that you are the owner of a real property located in Baguio City; that the same was foreclosed by the Mountain Province Development Bank; that after due notice to you and compliance with the requirement for advertisement in "Midland", a newspaper of wide circulation in Baguio City, the Office of the Sheriff of Baguio City sold your property in the amount of P190,000.00 on January 27, 1988; that the Bank notified you of your right to redeem your property within one year from the date of the Sheriff's sale; that upon informing the bank of your intention to redeem your property, it furnished you a statement of expenses in connection with the foreclosure sale (obviously, the Sheriff's foreclosure sale on January 27, 1988) which includes the amount of P20,000.00 as capital gains tax allegedly paid by the Bank of the B.I.R. You now request a ruling whether you can be required to refund the said amount of P20,000.00 to the bank. In reply, please be informed that the 5% capital gains tax is imposed on 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. (Section 21(e), Tax Code, as amended by Executive Order No. 37). A mortgage foreclosure sale is a form of conditional sale transaction. (RMC No. 41-86) Accordingly, the 5% capital gains tax is due on the selling price shown in the mortgage foreclosure sale. In other words, in this case, the tax should be paid after said foreclosure sale i.e., on January 27, 1988, but before the registration of the certificate of sale issued by the auctioneer conducting the foreclosure sale. (BIR Ruling No. 138-87) Since the capital gains tax was lawfully and legally due on the above mortgage foreclosure sale, the question as to whether you should refund the tax to the Bank is a matter which you should settle with said Bank. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner