Tax Liability of an Exchange of Real Estate

November 29, 1988 BIR RULING NO. 567-88 21 (c) 201-87 567-88 S i r : This refers to your letter dated June 14, 1988 requesting reconsideration/refund of the total sum of P7,185.00 which you and Mr. Danilo Bustalea respectively paid under protest, to the BIR Baclaran Regional Office on June 1, 1988 covering payments for capital gains involving a mere exchange of real estate (vacant lot) located in one (1) subdivision and near each other, without any consideration except your mutual agreement to such exchange. You contended that based on incontrovertible evidence, as shown in the deed of exchange, titles and tax declarations covering the lots exchanged, Section 21(e) of the Tax Code, which presumes the realization of capital gains from the exchange of real property, does not apply to the aforesaid transaction inasmuch as said evidence on your part suffice to overturn the said presumption since you and Mr. Danilo Bustalea did not realize any capital gains whatsoever from the transaction. In reply, please be informed that your request is hereby denied for lack of legal basis. Under Section 21(e) of the Tax Code, as amended, the 5% capital gains tax shall be based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. For this reason, this Office is of the opinion as it hereby holds that the presumption under Section 21(e) of the Tax Code, as amended, that capital gains is 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 is conclusive. Accordingly, any evidence that may be introduced to controvert said presumption cannot be taken into consideration. Such being the case, you are subject to the capital gains tax at the rate of 5% based on the zonal value of your property while Mr. Danilo Bustalea is likewise subject to the capital gains tax based on the zonal value of his property pursuant to Section 21(e) of the Tax Code, as amended, relative to the aforementioned exchange of your properties. cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner