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Q&A: What properties are exempted from Capital Gains Tax? | MyProperty.ph
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Q&A: What properties are exempted from Capital Gains Tax?

by MyPropertyPublished: June 7, 2018Updated: June 7, 2018

Capital Gains Tax can prove to be quite expensive for seller of real property. Knowing what properties can qualify for exemption, however, can save them a lot of money.

Q&A: What Properties are Exempted from Capital Gains Tax?

Payment of Capital Gains Tax (CGT) is a necessary part of a real estate transaction. There are, however, exceptions to this general rule. This article will discuss some cases when such exemptions apply.

To start, a brief explanation of CGT and who is responsible for it is suggested.

Q: What is CGT and who pays for it?

A: CGT is a tax that is always paid by the seller of a capital asset at a rate of six percent of its gross selling price, zonal value (BIR), or assessed value (provincial/city assessor), whichever is higher. A capital asset is any property that is not used in the seller’s trade or business.

Since the seller has the duty to pay CGT, it is only the seller that may file a claim for exemption.

Should the seller be engaged in a real estate business, the property sold will be considered as an ordinary asset. It will therefore fall under a different taxation scheme reserved for ordinary assets. To be clear, an ordinary asset is not regarded as exempt from CGT. This is because there is no duty to pay CGT to claim exemption from in the first place. Rather, an ordinary asset is subject to taxation through income tax.

When is there a requirement to pay CGT?

The BIR clarified when the duty to pay CGT arises. According to BIR Revenue Memorandum Circular No. 35-2017, “in order to be liable for payment of capital gains tax, there must be presumed gain from the sale, exchange or disposition of the real property.”

It further provided that, “(t)he mere issuance of tax declaration without any sale, exchange, or disposition is not subject to capital gains tax. Likewise, there must be transfer of ownership that resulted from sale, disposition or conveyance of real property. The payment of the capital gains tax is dependent and is a direct consequence of the sale, transfer or exchange. lt is not the transfer of ownership or possession per se that subjects the sale/transfer/exchange of the 6% capital gains tax but the profit or gain that was presumed to have been realized by the seller by means of said transfer (...)”

Simply put, CGT is only payable when there is a gain (profit) from the sale of a capital asset and a transfer of ownership resulted from the sale. Issuance of a tax declaration for a capital asset without an actual sale does not subject it to CGT.

What properties are exempt from CGT?

As discussed, CGT is only paid if the property is a capital asset, if the seller gained or profited from the transaction, and if a transfer of ownership occurred in the process. However, there are exemptions to the rule. These are:

  • Principal residence or family home;
  • Dealer in securities, regularly engaged in the buying and selling of securities;
  • An entity exempt from the payment of income tax under existing investment incentives and other special laws;
  • An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control;
  • A government entity or government-owned or controlled corporation selling real property;
  • If the disposition of the real property is gratuitous in nature;
  • Where the disposition is pursuant to Comprehensive Agrarian Reform Program (CARP) law

How does a principal residence or family home qualify for exemption?

First, the principal residence must be that as defined under BIR Revenue Regulation Nos. 13-99 amended by 14-00. It essentially states that the principal residence is the house and land upon which it is built on, where members of a family or unmarried individuals permanently reside. In order to claim exemption, the address that appears on the latest income tax return filed by the seller which immediately precedes the sale, must be the same as the property sold. This confirms it as the seller’s principal residence.

The following requisites must also be satisfied:

  • The funds from the sale or disposition of the seller’s principal residence must be fully applied to the acquisition or construction of a new principal residence within a period of eighteen calendar months of its sale;
  • The BIR Commissioner must be informed of the seller’s desire to avail of such exemption within thirty (30) days of the sale, through a prescribed return;
  • Such exemption may benefit the seller only once every ten (10) years;
  • Any proceeds from the sale of the principal residence that have not been utilized in acquiring or constructing a new principal residence shall be subject to six percent CGT;
  • The buyer of such principal residence shall withhold from the seller the six percent CGT the latter would have ordinarily paid. This will be taken from the funds of the property’s purchase price and placed in escrow. The parties to such an agreement will be the Revenue District Office having jurisdiction over the property and the seller.

What is the process of paying CGT?

These are the documents required for paying CGT:

  • BIR Form 1706 - Capital Gains Tax Return, For Onerous Transfer of Real Property Classified as Capital Asset (both Taxable and Exempt)
  • One original copy and one photocopy of the Notarized Deed of Sale or Exchange
  • Photocopy of the Transfer Certificate of Title; Original Certificate of Title; or Condominium Certificate of Title
  • Certified True Copy of the tax declaration on the lot and/or improvement during nearest time of sale
  • “Certificate of No Improvement” issued by the Assessor’s office where the property has no declared improvement, if applicable or Sworn Declaration/Affidavit of No Improvement by at least one (1) of the transferees
  • Copy of BIR Ruling for tax exemption confirmed by BIR, if applicable
  • Duly approved Tax Debit Memo, if applicable
  • “Sworn Declaration of Interest” as prescribed under Revenue Regulations 13-99, if the transaction is tax-exempt
  • Documents supporting the exemption

File BIR Form 1706 in triplicate with an Authorized Agent Bank of the Revenue District Office having jurisdiction over the property in question. Two copies are for the BIR and one will be for the seller taxpayer. If there is no Authorized Agent Bank then BIR Form 1706 must be filed with the Revenue Collection Officer having jurisdiction over the property or City/Municipal Treasurer. Filing must be done within 30 days from the sale of real property.

While this article was accomplished with great effort and research, MyProperty recommends that property buyers and owners consult professionals (licensed real estate brokers, real estate attorneys, property inspectors, financial institutions, etc.) to guarantee the proper processing of any real estate transaction.

Main photo via Depositphotos

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