Legal basis and governing provisions
- The regulations are issued pursuant to Section 244, in relation to Section 24(D)(2) of the National Internal Revenue Code of 1997, for exemption from capital gains tax on the sale, exchange, or disposition of a principal residence by eligible individuals.
- The regulations implement the exemption of capital gains presumed realized from the covered transactions and address the computation and consequences when conditions are not met.
- The regulations also address exchanges and cross-reference Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended regarding withholding when the condominium unit is treated as an ordinary asset.
- The regulations address documentary stamp tax accrual by referencing Section 196 of the 1997 Code for exchanges involving real property.
Policy and coverage covered persons
- The exemption applies to a citizen or resident alien individual taxable under Section 24 of the Code.
- The exemption covers the sale, exchange, or disposition of a taxpayer’s principal residence when the conditions are met.
- The exemption covers both: (a) dispositions for cash, and (b) dispositions in exchange for property other than cash, subject to stated conditions.
Defined terms for exemption
- A “Natural person” means a citizen or resident alien individual taxable under Section 24 of the Code and does not include an estate or a trust.
- “Principal Residence” means the dwelling house, including the land where it is situated, where the husband and wife or an unmarried individual (whether or not qualified as head of family) and members of his or her family reside.
- Actual occupancy is not considered interrupted or abandoned due to temporary absence for travel, studies, or work abroad, or similar circumstances.
- A principal residence must be characterized by permanency, meaning it is the dwelling house the individual intends to return to whenever absent.
- “Fully utilized” means the taxpayer:
- actually commenced construction of a new principal residence, or
- actually entered into a contract for purchase of a new principal residence
- within eighteen (18) calendar months from the date of sale, exchange, or disposition, with the intention to use the entire proceeds of sale for acquisition or construction of the new principal residence.
- Expenses paid by the seller in effecting the sale—documentary stamp tax, transfer fees, and broker’s commission, if any—are considered part of the amount utilized.
Core exemption conditions and documents
- Capital gains presumed realized from the sale, exchange, or disposition of a natural person’s principal residence are not imposed with income tax, including the six percent (6%) capital gains tax, subject to the following conditions.
- The taxpayer must submit a Sworn Declaration (ANNEX A) of intent to avail of the exemption, filed with the Revenue District Office (RDO) having jurisdiction over the location of the principal residence, within thirty (30) days from the date of sale, exchange, or disposition.
- The sworn declaration filing must include the following documentary requirements:
- a duly accomplished Capital Gains Tax Return (BIR Form No. 1706);
- proof of payment of documentary stamp tax on conveyance of real property;
- a sworn statement from the Barangay Chairman stating the principal residence is located within that barangay’s jurisdiction and that it has been the taxpayer’s residence as of the date of sale, exchange, or disposition;
- a duplicate original copy of the Deed of Conveyance of the principal residence;
- a photocopy of the Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT), if the principal residence sold is a condominium unit; and
- the latest Tax Declaration of the principal residence (land and improvement).
- The taxpayer must fully utilize the proceeds from the sale, exchange, or disposition by acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale, exchange, or disposition.
- To prove positive action within the 18-month period, the taxpayer must submit to the RDO concerned within thirty (30) days from lapse of the 18-month period:
- a sworn statement that the total proceeds have been actually utilized in acquiring or constructing the new principal residence; or if construction is still in progress, a sworn statement that the amount will be fully utilized to procure materials and pay labor and other construction expenses;
- a certified statement from the architect or engineer, or both, showing the cost of materials and labor;
- a certified copy of the Building Permit issued by the Office of the Building Official of the City or Municipality where the new principal residence shall be constructed, plus photocopies of submitted permit documents (e.g., building specification plan, construction plans, construction cost estimates);
- if the new principal residence is acquired by purchase, a duplicate original copy of the Deed of Absolute Sale covering the purchase.
- The exemption may be availed of only once every ten (10) years.
- The taxpayer must carry over the historical cost or adjusted basis of the old principal residence sold, exchanged, or disposed to the cost basis of the new principal residence.
- If proceeds are not fully utilized, the taxpayer becomes liable for deficiency capital gains tax, and only a fractional part of the historical cost is carried over to the new principal residence, based on the ratio of the utilized amount to the gross selling price.
Deficiency tax when proceeds not fully utilized
- If the entire proceeds are not utilized to purchase or construct a new principal residence, the capital gains tax attaches on the unutilized portion.
- The percentage of non-utilization is computed as:
- Unutilized Portion of GSP / GSP.
- The unutilized capital gains tax base equals multiplying that non-utilization percentage by the GSP or FMV, whichever is higher.
- The tax rate applied is six percent (6%).
- If the seller fails to utilize proceeds in full or in part within the 18-month period, the right of exemption does not arise to the extent of the unutilized amount, and the tax becomes immediately due and demandable on the 31st day after the date of sale, exchange, or disposition.
- The taxpayer must file the capital gains tax return covering the principal residence and pay the deficiency capital gains tax inclusive of:
- twenty five percent (25%) surcharge for late payment of the tax, plus
- twenty percent (20%) delinquency interest per annum, computed on the basis of the basic tax assessed.
- The interest runs from the 31st day after the date of sale until the date of payment.
- For purposes of the tax due date, “date of sale” means the date of notarization of the document of sale, exchange, or disposition.
Exchanges involving other property
- When a principal residence is disposed of in exchange for a condominium unit, the transferor’s disposition is not subjected to the capital gains tax prescribed, provided the condominium unit received in exchange is used by the taxpayer-transferor as the new principal residence.
- The exemption for principal residence exchanged for a condominium unit applies to the transferor only, while the condominium unit received by the transferee is subject to capital gains tax if treated as a capital asset, or subject to income tax withheld under Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended if treated as an ordinary asset.
- The condominium unit received is also covered by the exemption under Section 24(D)(2) when treated by an individual owner as that owner’s principal residence.
- When a principal residence is disposed of in exchange for a parcel of land and the land received is used for construction of the taxpayer’s new principal residence, no income tax or capital gains tax is imposed upon the principal residence owner, while the owner of the land is subject to capital gains tax or income tax, as the case may be.
- When the taxpayer acquires the new principal residence by exchanging the old principal residence plus cash or other property, the unutilized portion subject to capital gains tax is determined by the difference between:
- total consideration on conveyance of old principal residence (FMV of old principal residence + cash or FMV of other property) and
- total consideration received (FMV of new principal residence).
- In all exchanges of principal residence for another real property, documentary stamp tax under Section 196 of the 1997 Code accrues to both parties involved in the exchange.
- The taxpayer must still acquire the new principal residence within the eighteen (18) month reglementary period; otherwise, capital gains tax applies on the disposition of the principal residence.
Certificate authorization for registration
- Filing of the Sworn Declaration of Intent in the manner prescribed in the regulations is a sufficient basis for the RDO to issue a Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCL) for the principal residence sold, exchanged, or disposed.
- The CAR or TCL must state that the sale, exchange, or disposition of the taxpayer’s principal residence is exempt from capital gains tax pursuant to Section 24(D)(2) of the Code.
Repeal and amendment of inconsistent rules
- All existing rules and regulations or parts thereof that are inconsistent with the regulations are amended, modified, or repealed accordingly.