Law Summary
Definitions
- "Natural person": a citizen or resident alien individual subject to Section 24; excludes estates and trusts.
- "Principal residence": the dwelling (including land) where the individual and family reside; characterized by permanency and intention to return despite temporary absences.
- "Fully utilized": proceeds from sale used within 18 months to acquire or build a new principal residence, inclusive of selling expenses like documentary stamp tax and broker’s fees.
Conditions for Tax Exemption
- Submit a sworn declaration of intent to avail the exemption within 30 days from sale with the following attachments:
- Capital Gains Tax Return (BIR Form No. 1706)
- Proof of documentary stamp tax payment
- Barangay certification of residence
- Deed of Conveyance and Transfer Certificate of Title/Condominium Certificate of Title
- Latest tax declaration
- Proceeds must be fully used within 18 months for acquiring/building new principal residence.
- After 18 months, proof of utilization must be submitted via sworn statements, architect/engineer’s certification, building permits, or deed of purchase.
- Exemption can only be claimed once every 10 years.
- Historical cost of old residence carried over to new residence's cost basis.
- Non-full utilization triggers liability for deficiency capital gains tax.
Computation of Capital Gains Tax When Proceeds Are Not Fully Utilized
- Calculate the percentage of proceeds not utilized.
- Multiply this percentage by the higher of the gross selling price (GSP) or fair market value (FMV).
- Apply 6% capital gains tax on this amount.
- Tax and penalties (25% surcharge and 20% per annum interest) become due 31 days after sale if unutilized within 18 months.
Illustrative Examples
- Full utilization exempts from capital gains tax and allows cost basis carryover.
- Equal FMV and new acquisition cost results in exemption.
- Partial utilization results in prorated capital gains tax and adjusted cost basis for the new residence.
Disposition by Exchange for Property Other Than Cash
- Exchange of principal residence for a condominium unit used as new principal residence exempt from capital gains tax for the transferor.
- Transferee liable for capital gains or income tax subject to treatment of asset.
- Exchange for land to be used as new residence also exempt for transferor; landowner subject to tax.
- If old residence exchanged plus cash or other property, unutilized portion is taxed.
- Documentary stamp tax applies to both parties.
Issuance of Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCL)
- Filing of sworn declaration sufficient for RDO to issue CAR or TCL indicating exemption from capital gains tax.
Repealing Clause
- Inconsistent rules and regulations amended, modified, or repealed.
Effectivity
- Takes effect 15 days after publication.
- Applies retroactively to exemption availed from January 1, 1998, onward, subject to documentary compliance within 30 days from effectivity.