Law Summary
Definition of Principal Residence
- Includes the dwelling house and the land where the owner (husband and wife or unmarried individual) and family reside.
- Actual occupancy is not interrupted by temporary absences due to travel, study, or work abroad.
- Must exhibit permanency with intent to return whenever absent.
- In cases where land and dwelling are owned by different persons, only the dwelling qualifies as principal residence for capital gains tax exemption, except if both residents live there.
- For co-owners, exemption applies only to the proportionate share of those actually occupying the residence.
- The residential address in the most recent income tax return before sale is conclusively presumed to be the true residence for regulation purposes; lacking tax return, certification from barangay or building administrator suffices.
Conditions for Capital Gains Tax Exemption
- Tax is not imposed on presumed capital gains from sale or disposition if:
- Escrow Agreement: Capital gains tax rate of 6% is deposited in an interest-bearing escrow account with an Authorized Agent Bank (AAB) under agreement ensuring release only upon certification of purchase or construction of a new principal residence within 18 months.
- Filing of Capital Gains Tax Return: Seller must file BIR Form 1706 within 30 days of sale and submit required documents (e.g., proof of documentary stamp tax, sworn statement from Barangay Chairman or Building Administrator, duplicate deed, certified titles, tax declarations, and building permits if applicable).
- Post-Reporting Requirements: Within 30 days after the 18-month period, submit proof that proceeds were fully used to acquire or construct new principal residence, including sworn statements and certified documents from architects or engineers.
- Release of Escrowed Funds: Upon satisfactory proof, funds plus interest are released.
- One-Time Tax Exemption Limit: Can only be availed once every 10 years.
- Cost Basis Carryover: Adjusted cost basis of old residence is carried to the new residence.
- Assessment for Deficiency Tax: Failure to prove utilization within 18 months leads to deficiency tax assessment with 20% interest and forfeiture of escrowed funds.
- Partial Utilization: Leads to deficiency tax and interest on portions not used for new principal residence acquisition or construction.
Issuance of Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCL)
- Compliance with preliminary exemption conditions allows issuance of CAR or TCL stating exemption under Section 24(D)(2) but subject to post-reporting compliance.
Penalties
- Barangay Chairman or Building Administrator who falsely certifies a principal residence commits perjury, punishable at the discretion of the court.
- Other violations are punishable with fines up to P1,000, imprisonment up to 6 months, or both, under Section 275 of the Code.
Repealing and Effectivity Clauses
- Inconsistent revenue issuances are revoked, amended, or modified accordingly.
- The Regulations take effect 15 days after publication in a newspaper of general circulation.