BIR Ruling No. 585-12

October 5, 2012 BIR RULING NO. 585-12 Sections 24 (D) (2), 248 (A) (1) and (3) and 249 of the NIRC; RR 14-00; BIR Ruling No. 035-10; BIR Ruling No. 107-99 Ms. Jocelyn B. Ong No. 43 Banaba Street, Phase 5 Greenwoods Executive Village 1900 Cainta, Rizal Dear Ms. Ong : This refers to your letter dated January 4, 2012 requesting exemption from capital gains tax on the sale of your principal residence pursuant to Section 24 (D) (2) of the Tax Code of 1997, as amended. It is represented that your principal residence at No. 43 Banaba Street, Phase 5, Greenwoods Executive Village, 1900 Cainta, Rizal was sold on December 30, 2011 to spouses Razel and Mary Selane Espos under BDO Home Loan; that you have acquired on December 1, 2011 a ready-made townhouse located in 51-B San Isidro Street, Brgy. Kapitolyo, Pasig City under China Bank Home Loan Program; that the acquisition cost of the townhouse is higher than the proceeds from the sale of your residence; that you have written the Revenue District Office (RDO) No. 46-Cainta/Taytay for the exemption from the imposition of capital gains tax (CGT) of the sale of your residence; that however, there was an issue regarding the dates of disposition and acquisition of the houses/residences; that it is your sentiment that the sale of your residence depended on your acquisition of a new home to transfer to; and that your new home is currently being registered in Pasig City. In reply, please be informed that Section 24 (D) (2) of the Tax Code of 1997, as amended, provides that capital gains presumed to have been realized from the sale or disposition of principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under Section 24 (D) (1) of the same Code, provided, that the historical cost or adjusted cost basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired, and that the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of your intention to avail of the tax exemption thus mentioned, and which can only be availed of once every ten (10) years. aETDIc The same Section further provides that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the selling price in order to determine the taxable portion for the purpose of computing the tax prescribed under Section 24 (D) (1) of the same Tax Code. Revenue Regulations (RR) No. 13-99, as amended by RR No. 14-2000 1 provides for the conditions for the exemption from capital gains tax under Section 24 (D) (2) of the Tax Code of the sale of a principal residence by a natural person: SEC. 3. Conditions for Exemption . The general provisions of the Code to the contrary notwithstanding, capital gains presumed to have been realized from the sale, exchange or disposition by a natural person of his Principal Residence shall not be imposed with six percent (6%) capital gains tax, subject to compliance with the following: (1) Escrow Agreement . The six percent (6%) capital gains tax otherwise due on the presumed capital gains derived from the sale, exchange or disposition of his Principal Residence shall be deposited in cash or manager's check in interest-bearing account with an Authorized Agent Bank (AAB) under an Escrow Agreement (ANNEX A hereof) between the concerned Revenue District Officer, the Seller/Transferor and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such Seller/Transferor upon certification by the said RDO that the proceeds of sale or disposition thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferor's new Principal Residence within eighteen (18) calendar months from date of the said sale or disposition. The date of sale or disposition of a property refers to the date of notarization of the document evidencing the transfer of said property. In general, the term "Escrow" means "A scroll, writing or deed, delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the latter until the happening of a contingency or performance of a condition, and then by him delivered to the grantee, promisee or obligee." aTCADc (2) Capital Gains Tax Return . The Seller/Transferor shall file, in duplicate, his Capital Gains Tax Return (BIR FORM No. 1706) covering the sale or disposition of his Principal Residence with the concerned Revenue District Office within thirty (30) days from date of its sale or disposition: Provided, however, that the Seller/Transferor shall not be required to pay any capital gains tax during the 18-month period on the sale of his principal residence duly established as such. Provided, further, that for purposes of the capital gains tax otherwise due on the sale, exchange or disposition of the said Principal Residence, the execution of the Escrow Agreement referred to in the immediately preceding Section 3 (1) hereof shall be considered sufficient. "The following shall be submitted with the Capital Gains Tax Return herein required to be filed: (a) Proof of payment of the documentary stamp tax imposed under Sec. 196 of the Tax Code of 1997 on the deed of sale or conveyance of the said "Principal Residence;" (b) A sworn statement from the Barangay Chairman that the taxpayer's Principal Residence is located within the jurisdiction of that Barangay and that the same has been his residence immediately prior to the date of its sale or disposition: Provided, however, that if the taxpayer's Principal Residence sold or disposed is a condominium unit, in lieu of the said Barangay Chairman, the certification shall be issued by the Building Administrator of the Condominium building; (c) A duplicate original copy of the Deed of Conveyance of his Principal Residence; (d) A certified xerox copy of the Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT), in case of a condominium unit, covering the Principal Residence sold or disposed; (e) A certified xerox copy of the latest Tax Declaration covering the said Principal Residence (land and improvement); and HSaCcE (f) If the building or improvement thereon has been constructed on or after the year 1990, the Building Permit or Occupancy Permit issued by the concerned city or municipality, showing the amount of the construction cost thereof. xxx xxx xxx As represented, the sale of your residence was made after your acquisition of a townhouse as your new residence, therefore, the proceeds from such sale cannot be said to have been fully utilized for the acquisition of a new residence. Moreover, aside from the notification to avail of this exemption, you have not presented evidence of your compliance with the foregoing requirements under the aforementioned Regulations. Since you failed to abide by the requirements under the regulations, there is no basis to declare that the sale of your principal residence is exempt from capital gains tax. (BIR Ruling No. 035-10 dated August 27, 2010) Premises considered, your application for tax exemption is denied inasmuch as there is no factual or legal basis to declare that the sale of your principal residence is exempt from CGT. Because taxes are the lifeblood of the nation, the court has always applied the doctrine of strict interpretation in construing tax exemptions. A claim for exemption from tax payments must be clearly shown and be based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception. ( Paseo Realty & Development Corporation v. Court of Appeals, et al., G.R. No. 119286, October 13, 2004 , as cited in Davao Oriental Electric Cooperative, Inc. vs. The Province of Davao Oriental, G.R. No. 170901, January 20, 2009 ) Accordingly, the sale of your property located at No. 43 Banaba Street, Phase 5, Greenwoods Executive Village, 1900 Cainta, Rizal to spouses Razel and Mary Selane Espos on December 30, 2011 is subject to capital gains and documentary stamp taxes. The imposition of the surcharge and interest on delinquency is mandatory under Sections 248 (A) (1) and (3) and 249, both of the Tax Code of 1997. Further, Section 3 (7) of RR No. 14-00 likewise provides: IEcDCa "(7) Assessment for Deficiency Capital Gains Tax; Application of the Escrowed Bank Deposit Against the Deficiency Tax. If the Seller/Transferor fails to submit documentary evidence within thirty (30) days after the lapse of the aforesaid 18-month period, showing that he has utilized the proceeds of sale, exchange or disposition of his old Principal Residence to acquire or construct his new Principal Residence, it shall be presumed that he did not, in fact, utilize the aforesaid proceeds of sale for the construction or acquisition of his new Principal Residence, in which case, he shall be treated deficient in the payment of his capital gains tax from the sale or disposition of his aforesaid Principal Residence, and shall be accordingly be assessed for deficiency capital gains tax, inclusive of the 20% interest per annum, pursuant to the provisions of Section 228 of the Code, as implemented by Revenue Regulations No. 12-99, in relation to Section 249 of the said Code." Strong reasons of policy support a strict observance of the rule regarding the payment of tax. (BIR Ruling No. 107-99 dated July 15, 1999) Thus, the imposition of surcharge, penalties and interest, if any, shall commence from the date of the lapse of the appropriate periods for filing and payment of the aforementioned taxes. HCDAcE This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts as represented are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Amending Sections 2 (2), 3 and 6 of Revenue Regulations No. 13-99 vis-a-vis sale, exchange or disposition, by a natural person, of his "Principal Residence".