Capital Gains Tax

1.   Sale of real property which is subject to the right of redemption:

(i.e. extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance companies)

-          The final tax is due upon the expiration of the redemption period without the mortgagor having exercised such right to redeem.

o   In this case, the capital gains tax shall be based on the bid price of the highest bidder.

o   In case the mortgagor exercises his right or redemption within one year from issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gain was derived by the mortgagor and no sale or transfer of the real property occurred.

o   Note: in case of non-redemption of the property, the capital gains tax is due within 30 days from the expiration of the redemption period.

2.   RMC No. 58 – 2008

For purposes of reckoning the one-year redemption period, in the case of ndividual mortgagors, or the three-month redemption period for juridical persons/mortgagors, the same shall be reckoned from the date of the confirmation of the auction sale which is the date when the certificate of sale is issued.

In case of non-redemption, the capital gains tax on the foreclosed capital asset of the mortgagor shall become due within thirty (30) days following the expiration of the redemption period referred to in the preceding paragraph. Nonetheless, if the property is an ordinary asset of the mortgagor, the creditable expanded withholding tax shall be due and paid within ten (10) days following the end of the month in which the redemption period expires. If the property foreclosed is under the circumstances which warrant the imposition of the Value-added Tax (VAT) under Section 106 of the Tax Code, as implemented by Revenue Regulations No.4-2007, the VAT must be paid by the mortgagor on or before the 20th day or 25th day, whichever is applicable, of the month following the month when the right of redemption prescribes. Moreover, the payment of the documentary stamp tax and the filing of the return thereof shall have to be made within five (5) days from the end of the month when the redemption period expires. The taxes due on the foreclosure sale must be based on the bid price of the highest bidder pursuant to Revenue Regulations No. 4-99.

The classification of the asset as either ordinary asset or capital asset depends upon the nature of the asset in the hands of the mortgagor.  Under the foregoing circumstances, the mortgagee banks, quasi-banks, and trust companies, are considered the statutory sellers in the foreclosure sales of these foreclosed real properties, and are thus, expected to have paid the aforesaid taxes, within the period provided therefor, once the redemption period thereon has expired, hence, without need to further wait for another or subsequent buyer before taxes on said foreclosed property shall be paid. Generally, the venue for the filing of the returns and payment of taxes on foreclosure sales, except the VAT, shall be at the place where the real property foreclosed is located. The VAT, if applicable, must in all cases involving foreclosure sale of real property, be paid by the VAT-registered mortgagor through the filing of the required return in the Revenue District Office (RDO) where the said mortgagor is registered.

3.   Due Date for CGT on foreclosure sales by rural banks:

Under RA 720, as amended by RA 5939, land mortgaged to a rural bank may  be redeemed within two years from the following dates:

1.    The date of foreclosure sale if the property is not covered by a Torrens Title or

2.    From the registration date of the sheriff’s certificate of sale of such foreclosure if the property is covered by a Torrens Title

Hence, if the mortgagee is a rural bank, the 30-day period within which to pay the Capital Gains tax is reckoned from the lapse of the two year redemption period.

However, the DST should be paid on or before the fifth day of the month following the execution of final deed of the sale made by the sheriff.

(BIR Ruling No/. 010-2005 August 2, 2005)

4.   CAPITAL GAINS TAX AND DST ON FORECLOSURE SALE

Q: What is the present law on the transfer of title under a foreclosure sale?

A: If the mortgage was foreclosed judicially, a certified copy of the final order of the court confirming the sale shall be registered with the Register of Deeds.

If no right of redemption exists, the certificate of title of the mortgagor will be cancelled, and a new certificate is issued in the name of the purchaser.

However, where the right of redemption exists, the certificate of title of the mortgagor shall not be cancelled. In the event the property is redeemed, the certificate or Deed of Redemption shall be filed with the Register of Deeds, and a brief memoranda concerning the redemption shall be made on the certificate of title of the mortgagor. If the property is not redeemed, the final deed of sale will be executed by the sheriff in favour of the purchaser, and the title of the mortgagor shall be cancelled with the issuance of a new certificate in the name of the purchaser.

Q: When should the capital gains tax due on foreclosed properties be paid?

A: At the time the property is foreclosed, no capital gains tax will be imposed since no sale or transfer of property has taken place.

If the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, the certification to that effect or the deed of redemption should be filed with the Revenue District Office having jurisdiction over the place where the property is located. Such certification must also be filed with the Register of Deeds.

In case of non-redemption, the capital gains tax on the foreclosure sale shall become due based on the bid price of the highest bidder. The tax will be imposed only upon the expiration of the one-year period of redemption, and shall be paid within 30 days from the expiration of the said one-year redemption period with an authorized agent bank (AAB) located at the revenue District Office having jurisdiction over the place where the property is located.

Q: When should the documentary stamp tax be imposed?

A: In case the mortgagor exercises his right of redemption, the transaction shall only be subject to the documentary stamp tax (DST) of P15.00 inasmuch as no land or realty was sold or transferred for a consideration.

In case of non-redemption, the corresponding DST shall be levied, collected and paid by the person making, signing, issuing, accepting or transferring the real property wherever the document is made, signed, issued, accepted or transferred if the property is situated in the Philippines. However, in case one party to the taxable document enjoys exemption from the tax, the other part in the transaction who is not exempt shall be the one directly liable for the tax. The DST shall be computed based on the bid price at the same time the return is filed.

The DST must be paid and the tax return filed within ten (10) days after the close of the month following the lapse of the one-year redemption period. The return must be filed with the AAB located at the Revenue District Office having jurisdiction over the place where the property is located.

Q: When will the BIR issue the Tax Clearance Certificate?

A: In case of non-redemption, a tax clearance certificate (TCL) or Certificate Authorizing Registration (CAR) in favor of the purchaser/highest bidder shall be issued upon presentation of the capital gains and DST tax returns duly validated by the authorized agent bank (AAB) evidencing full payment of the capital gains tax and DST due on the sale of the property classified as capital asset.

(Implenting Sec. 24 (D) (1) and Sec 27 (D)(5) of the 1997 Tax Code as amended by RANo. 8424; Date of Issue: March 9, 1999; Effective fifteen days after publication in newspaper of general circulation)

5.   G.R. No. 165617 Februaury 25, 2011, SUPREME   TRANSLINER, INC., MOISES C. ALVAREZ and PAULITA S. ALVAREZ, - versus - BPI FAMILY SAVINGS BANK, INC.

It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real property until after the expiration of the one-year redemption period as provided in Act No. 3135 and title thereto is consolidated in the name of the mortgagee in case of non-redemption.  In the interim, the mortgagor is given the option whether or not to redeem the real property.  The issuance of the Certificate of Sale does not by itself transfer ownership.

RR No. 4-99 issued on March 16, 1999, further amends RMO No. 6-92 relative to the payment of Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance companies. 

SEC. 3.  CAPITAL GAINS TAX. –

(1) In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. x x x

(2)  In case of non-redemption, the capital gains [tax] on the foreclosure sale imposed under Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based on the bid price of the highest bidder but only upon the expiration of the one-year period of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the expiration of the said one-year redemption period.

SEC. 4.  DOCUMENTARY STAMP TAX. –

(1) In case the mortgagor exercises his right of redemption, the transaction shall only be subject to the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code of 1997 because no land or realty was sold or transferred for a consideration.

(2)  In case of non-redemption, the corresponding documentary stamp tax shall be levied, collected and paid by the person making, signing, issuing, accepting, or transferring the real property wherever the document is made, signed, issued, accepted or transferred where the property is situated in the Philippines. x x x  (Emphasis supplied.)

n this case, the retroactive application of RR No. 4-99 is more consistent with the policy of aiding the exercise of the right of redemption.   As the Court of Tax Appeals concluded in one case, RR No. 4-99 “has curbed the inequity of imposing a capital gains tax even before the expiration of the redemption period [since] there is yet no transfer of title and no profit or gain is realized by the mortgagor at the time of foreclosure sale but only upon expiration of the redemption period.” In his commentaries, De Leon expressed the view that while revenue regulations as a general rule have no retroactive effect, if the revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation shall have retroactive operation as to affect past transactions, because a wrong construction of the law cannot give rise to a vested right that can be invoked by a taxpayer.

            Considering that herein petitioners-mortgagors exercised their right of redemption before the expiration of the statutory one-year period, petitioner bank is not liable to pay the capital gains tax due on the extrajudicial foreclosure sale. There was no actual transfer of title from the owners-mortgagors to the foreclosing bank.  Hence, the inclusion of the said charge in the total redemption price was unwarranted and the corresponding amount paid by the petitioners-mortgagors should be returned to them.