Are you planning to sell real property that has been previously subject to a loan mortgage? If you are, better read on. The Bureau of Internal Revenue (BIR) has issued Revenue Memorandum Circular (RMC) No. 19-2018 dated March 19, 2018 to clarify the basis for the computation of Capital Gains Tax (CGT) and Documentary Stamp Taxes (DST) covering sale transactions of previously mortgaged real property.

Generally, what are the tax implications on the sale of real property, classified as a capital asset and located in the Philippines? According to the National Internal Revenue Code (Tax Code), as amended, such sale of real property is subject to a CGT of 6 percent based on the gross selling price, or fair market value (FMV), whichever is higher. Also, the document embodying the sale transaction, which is usually a Deed of Sale, is subject to a DST of 1.5 percent on the consideration contracted to be paid for such realty, or on the FMV, whichever is higher.

From the foregoing it is clear that the only basis for the computation of the CGT and the DST is the higher value of:

1) the gross selling price or the consideration contracted to be paid for such realty; or

2) fair market value (FMV)

In particular, what constitutes the FMV of real property is further qualified by the Tax Code. Under Section 6, the Commissioner of Internal Revenue (CIR) is given the authority to divide the Philippines into different zones, and to provide the FMV of real properties located in each zone, upon consultation with competent appraisers both from the private and public sectors. The FMV as determined by the CIR is popularly referred to as the “zonal value”. The BIR issues “Department Orders” for each Revenue District Office (RDO), showing the zonal values of real property falling within the jurisdiction of the particular RDO. The zonal values for each RDO is available at the BIR website, www.bir.gov.ph.

In addition, under Section 6, the FMV of real property may also be determined through the schedule of values of real property issued by the Provincial and City Assessors. So, which of the values, the zonal value, or the schedule of values issued by the Provincial and City Assessors, determine the FMV of real property? It is the one with the higher value.

For those familiar with Philippine taxation, the discussion we’ve just had is hardly new information. What then is all the fuss about RMC No. 19-2018? It has come to the attention of the BIR that certain Revenue District Officers compute the CGT and DST, specifically covering sales transactions of previously mortgaged real property, on the assessed value of the property in relation to a mortgage loan. Usually, when real property is mortgaged to secure a loan, the lender (usually the bank) undertakes a process to evaluate a property’s value based on a given point in time. The evaluation, which is performed by a professional appraiser, will yield a value of the property which, in most cases, is higher than the FMV as previously discussed. This may result in the taxpayer paying for more CGT/DST than what he should have. At any rate, this assessed value of property for mortgage loan purposes, should not be confused with the zonal values, nor with the values of real property as determined by the Provincial and City Assessors, and should never be the basis for the computation of CGT and DST.

So, to recap, the only basis for the computation of the CGT and the DST is the higher value of:

1) the gross selling price or the consideration contracted to be paid for such realty; or

2) zonal value or values of real property as determined by the Provincial and City Assessors, whichever is higher.

Manila Times Source

ATTY. PEACHES ARANAS

Managing Partner LMA LAW