Tax Exception of Primary Residence
By: Atty. Bobby Gallardo
Partner, Tax & Corporate Services Division
Laya Mananghaya & Co.
Its mixed emotions that I feel, now that my wife and I have finally reached that phase of our married life where all our children have settled down and have their own families. We now find ourselves left all alone in a modest house that was a taciturn and an accommodating witness to our lifelong family memories. For practical purposes, we are thinking of transferring to a condominium unit located in an area that is most accessible to some basic support institutions. As we are practically dependent on our lifetime savings, we need some advise on how we can minimize our tax payments in case we decide to sell our house and use the proceeds to acquire one that will suit our needs as we approach our twilight years together.
Your letter left me melancholic and felt a longing for my parents who are staying at our ancestral home in the province. And I can almost feel your sadness as you make this tough decision of parting with your kingdom where dreams were dreamt and were made to realize. Life as we experience it, is becoming different and difficult and we have to look and give more weight to the practical side of things now.
Ah!, before I get philosophical about life, let me inform you that the Tax Code in this particular case is more considerate and cognitive of the sentiments of people who are parting with their principal place of abode. As a general rule, a sale or exchange of assets have income tax implications. However, on the sale of your principal residence, you, as an individual seller, will not be subject to the 6% capital gains tax, provided you comply with certain requirements of the BIR.
Yes, as in the case of all tax exemptions, all the required supporting documents have to be submitted to the BIR for the exemption to be validly enjoyed. The documents to be submitted include a sworn letter of intent to avail of the tax exemption, the duplicate of the capital gains tax return, the proof of payment of the documentary stamp tax on the deed of sale or conveyance of your principal residence, a sworn statement from the Barangay Chairman that your principal residence is located within the jurisdiction of that Barangay and that the same has been your residence immediately prior to the date of its sale or disposition, the covering Deed of Conveyance, a certified photocopy of the Transfer Certificate of Title (TCT) covering the principal residence sold, a certified photocopy of the latest tax declaration covering the said principal residence (land and improvement), and the building or occupancy permit issued by the concerned city or municipality, showing the amount of the construction cost thereof.
Not so fast now! This exemption is not given outright as you would be required to first deposit in cash or manager’s check, the 6% capital gains tax otherwise due on the sale in an interest-bearing account with an Authorized Agent Bank (AAB) under an Escrow Agreement to be entered between you, the concerned Revenue District Officer (RDO), and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to you upon certification by the said RDO that the proceeds of the sale or disposition of the principal residence has, in fact, been utilized in the acquisition of your new principal residence (condominium unit) within 18 calendar months from notarial date of the document evidencing the said sale or disposition.
And to finally avail of the exemption , you should submit to the RDO concerned within 30 days from the lapse of the 18 calendar months from the date of sale the post reporting requirements such as, a sworn statement that the total proceeds from the sale of your old principal residence has been actually utilized in full to acquire the condominium unit (as your new principal residence) and a duplicate original copy of the Deed of Absolute Sale covering such purchase. As a rule, the Escrow on the aforesaid bank deposit is to be released in your favor within 15 days upon complete submission of the necessary documentary evidence.
However, there is a catch. If upon the lapse of 30 days following the end of the 18-month acquisition period, you failed to submit documentary evidence required above, the RDO concerned will initiate the assessment of your deficiency capital gains tax, inclusive of the 20% interest per annum, computed from the 31st day after the date of sale or disposition of the said principal residence. Once the subject deficiency tax assessment becomes final and executory, the RDO can apply the escrowed bank deposit account against such deficiency. If the escrowed amount is insufficient to cover the entire amount assessed, you shall remain liable for the remaining balance of the assessment. On the other hand, any excess of the deposit in escrow will be returned to you, by the Bank, upon written authorization from the BIR Commissioner or his duly authorized representative.
Please note that the above tax exemption privilege may be availed of only once every ten (10) years. This means that you can change your principal residence once in ten years without the attending tax cost bothering you.
But more than anything else, let us, children (and in-laws!), be reminded that more than the exemption given under our Tax Code, what is most important and meaningful now for special people like our letter sender is for us to show, more than ever, our love, respect, attention, care and understanding for them!