Capital Gains Tax on the Sale of Lots in a Subdivision Registered in the Name of Private Individuals

November 15, 1988 BIR RULING NO. 540-88 21 (e) 415-87 540-88 Gentlemen : This refers to your letters dated September 2 and October 4, 1988 requesting in effect a ruling as to whether or not the sale of lots in a subdivision registered in the name of private individuals but covered by subdivision development contracts (Joint Venture) is subject to the payment of capital gains tax. cdta It is represented that your principal business is the development of raw lands into individual residential lots, and the sale of the same to interested buyers; that in many instances, you entered into Joint Venture Contracts with owners of raw lands whereby you develop the property and sell the individual lots, with the gross proceeds divided between you and the landowner in the proportion agreed upon; and that standard in most subdivision entered into are the following provisions: "While Title to the properties shall remain in the name of the landowner, the Subdivision Developer, however, shall have sole, full and irrevocable authority to manage and dispose of the properties as Attorney-in-Fact, coupled with interest, and a copy of this contract shall be annotated at the back of the Title and registered with the corresponding Registry of Deeds. The Subdivision Developer, however, cannot encumber or otherwise mortgage the properties subject of this contract without the consent of the landowner. "The Subdivision Developer shall have full exclusive and irrevocable authority to do and perform any and all acts requisite and necessary for the development, promotion, management, sale and disposition of all lots in the subdivision, including the power and authority to sign and execute alone every contract of sale of all subdivision lots, deeds of donation for all proposed roads and open space in favor of the government, and to receive and collect all proceeds of sale subject to the terms and conditions herein contained. "The Subdivision Developer, upon execution of this Contract, shall have full possession of the above described properties with full power to exercise all acts necessary to survey, subdivide, develop, dispose and sell lots of the properties subject hereof and to introduce therein all the improvements. "All expenses to be incurred in connection with the subdivision, development, promotion, administration and sale of lots in the subdivided land shall be borne and shouldered exclusively by the Subdivision Developer; said expenses shall include the payment of all realty taxes, assessments, fees and impositions over the properties which shall and become due after the date of this subdivision contract." In reply, please be informed that under Section 21(e) of the Tax Code, as amended, 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. Such being the case, and since the lots referred to are being held primarily for sale to customers in the ordinary course of the trade or business of its registered individual owners in Joint Venture with you, the sale of the same is therefore, exempt from the payment of the 5% capital gains tax. However, gains derived from the aforementioned sale of said lots are subject to the 35% tax imposed under Section 24(a) of the Tax Code, as amended, in relation to Section 20(b) of the same Code. This serves as an authority for the Revenue District Officer concerned to issue Certificate Authorizing Transfer of Title to real property insofar as the aforementioned lots are concerned. cdti Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner