Circularizing the Tax Incentives of Sellers of Real Properties

October 5, 2001 REVENUE MEMORANDUM CIRCULAR NO. 42-01 SUBJECT : Circularizing the Tax Incentives of Sellers of Real Properties in Existing Areas for Priority Development (APDs) Sites, and in other Areas that may be Identified by the Local Government Units as Suitable for Socialized Housing Projects under R.A.No.7279, Otherwise Known as the "Urban Development andHousingAct of 1992" and the Valuation of the Subject Real Properties for National Internal Revenue Tax Purposes. TO : All Internal Revenue Officers and Others Concerned For further information and guidance of the taxpaying public and all internal revenue officers and others concerned, the tax incentives granted to sellers of real properties in existing Areas for Priority Development (APDs) sites and in other areas that may be identified by Local Government Units, in coordination with the National Housing Authority, the Housing and Land Use Regulatory Board, the National Mapping Resource Information Authority, and the Land Management Bureau, as suitable for socialized housing and resettlement areas for the immediate and future needs of the underprivileged and the homeless in the urban areas under R.A. No. 7279, otherwise known as the " Urban Development and Housing Act of 1992," as implemented by Revenue Regulations No. 9-93, as amended by Rev. Regs. No. 11-97, and the valuation of the subject real properties for national internal revenue tax purposes are hereby further circularized in order to expedite the issuance of CAR/TCL. I. Applicable Laws and Revenue Issuances 1. Republic Act No. 7279, otherwise known as the '' Urban Development and Housing Act of 1992" 2. Revenue Regulations No. 11-97, amending Rev. Regs. No. 9-93, implementing R.A. 7279 3. Resolution No. 1-90 dated January 23, 1990 of the BIR Technical Committee on Real Property Valuation 4. Sections 196, 6(E), and 173 of the Tax Code of 1997 II. Tax Incentives of Sellers of Subject Real Properties under Secs. 19 and 20 of Article V, Sec. 25 of Article VI and Sec. 32 of Article VIII of R.A. No. 7279. A. National Housing Authority (NHA) The NHA, being the primary government agency in charge of providing housing for the underprivileged and homeless citizens shall be exempted from the payment of the following national internal revenue taxes: (1) Ordinary corporate income tax and the corresponding creditable (expanded) withholding tax on the income/gain realized from the sale, exchange or other disposition of real properties under the socialized housing program as provided in RA 7279. (2) Documentary stamp tax on sales transactions executed by and in favor of the NHA in connection with socialized housing projects. Since Section 19 of R.A. 7279 exempts " all documents or contracts executed by and in favor of the NHA ," the exemption from documentary stamp tax extends to the other party (either seller or buyer) that is dealing or transacting with the NHA. Provided, however, that in the case of foreclosure sale of real property mortgaged to NHA by qualified beneficiaries of socialized housing, NHA, as statutory seller, shall be liable to the payment of capital gains tax and documentary stamp tax otherwise due from the mortgagor-debtor. Provided further, that if the latter redeems the property within the one-year redemption period, the amount of tax paid by NHA may be collected from the mortgagor-debtor. B. Private Sector Participating In Socialized Housing. To encourage greater private sector participation in socialized housing and further reduce the cost of housing units for the benefit of the underprivileged and homeless citizens, the private sector shall be exempt from the payment of the following national internal revenue taxes: (1) Project-related corporate or individual income taxes on a per project basis on income directly realized from the development of socialized housing sites: Provided, that the sale or any disposition of lot and/or house and lot packages beyond the maximum amount of P180,000 (or such suggested amount as may later on be determined by the HLURB) shall be subject to the corresponding income taxes. (2) Capital gains tax on sale of raw lands for use in socialized housing project; (3) Value added tax for the project contractor/developer/seller or owner of socialized housing project; (4) Donor's tax for lands certified by the proper LGU to have been donated for socialized housing purposes. However, sale or exchange of the property intended for socialized housing under this category shall be subject to the documentary stamp tax in accordance with the provision of Sec. 196 of the Tax Code of 1997, subject to the valuation rules as stated in Item IV of this Circular. Provided, that upon application for exemption from the donor's tax, income tax or capital gains tax, as the case may be, an annotation at the back of the TCT that the land shall be used for socialized housing shall be made by the Register of deeds concerned; Provided, further, That the socialized housing development plan has already been approved by the HLURB or HUDCC. C. Real Properties sold under the Community Mortgage Program (CMP). Properties sold under the CMP shall be exempt from the capital gains tax or income tax, and consequently from the creditable (expanded) withholding tax, whether sold by an individual, estate or trust, or by a corporation. However, the documentary stamp tax shall be paid on every sale of property under the CMP based on whichever is higher between the actual consideration of sale stated in the document or the fair market value that shall be determined by comparing the zonal value and the Local Government Assessor's fair market value. D . Areas for Priority Development (APDs), zonal improvement program sites, and slum improvement and resettlement program sites. Properties identified as APDs, and slum improvement and resettlement program sites, when sold by private owners, shall likewise be exempt from the capital gains tax or income tax, and consequently from the creditable (expanded) withholding tax, whether sold by an individual, estate or trust, or by a corporation. However, the documentary stamp tax shall be paid on every sale of the said property based on the actual consideration of sale stated in the document or the value stated in the latest real property Tax Declaration issued by the Provincial or City Assessor, whichever is higher, but in no case shall the said documentary stamp tax be passed on to the occupants thereof as the latter are expressly exempted from the payment thereof pursuant to Section 25, Article VI of R.A. No. 7279. (Section 173, Tax Code of 1997). III. Valuation of Lands for Sale Intended for Socialized Housing Purposes, those with Blighted Status, and those Identified as Areas for Priority Development (APDs) In general, for purposes of the documentary stamp tax, sale of lands intended for socialized housing developments, such as raw lands, shall be based on whichever is the higher of the actual consideration or the fair market value as determined under Section 6(E) of the Tax Code of 1997 (Section 196 of the Tax Code of 1997). For sites already occupied by qualified Program beneficiaries with blighted status as certified by the Local Government Units or by the National Housing Authority and by the Housing and Land Use Regulatory Board, and those which have already been identified or will in the future be identified as APDs by duly authorized government agencies, the fair market value reflected in the zonal valuation issued by the Bureau of Internal Revenue shall not apply ( Resolution No. 1-90 dated January 23, 1990 issued by the BIR Technical Committee on Real Property Valuation ). Hence, the value appearing in the latest real property Tax Declaration issued by the Provincial and City Assessors or the actual consideration of sale stated in the document, whichever is higher, shall be the basis of the documentary stamp tax (Section 196 in relation to Section 6(E), Tax Code of 1997)). An area shall be considered as APD by the Bureau on the basis of the submission of a certification to that effect submitted by the HLURB, NHA, or other duly authorized government agency. IV. Summary In summary, the documentary stamp tax consequences of the various transactions under R.A. No. 7279 shall be as follows: 1. If the NHA is a party to the sale, other than a foreclosure sale of the mortgaged property, no documentary stamp tax shall be due on such sale, either on NHA or the party with which the NHA is transacting. 2. In the case of socialized housing projects where the private sector is the owner/seller/developer, documentary stamp tax shall be imposed on the basis of actual consideration or the fair market value of the land as determined in accordance with Sec. 6(E) of the Tax Code of 1997, whichever is higher. However, if the real property is located in an area which has been declared as APD, the rule in No. 4 below will apply. 3. In the case of CMP, documentary stamp tax shall be imposed on the sale and shall be computed based on whichever is higher between the actual consideration of the sale stated in the document or the fair market value that is determined by comparing the zonal value and the Local Government Assessor's fair market value, whichever is higher. However, if the real property is located in an area which had been declared as APD, the rule in No. 4 below will apply. 4. If the real property is situated in an area that has been declared as an APD, documentary stamp tax shall be imposed based on the value appearing in the latest Tax Declaration issued by the Provincial or City Assessor or the actual consideration of the sale as stated in the document, whichever is higher. However, only the seller is subject to the documentary stamp tax, since the occupants are exempt from the said tax. All internal revenue officers and others concerned are requested to give this Circular as wide a publicity as possible. (SGD.) RENE G. BAEZ Commissioner of Internal Revenue