Capital gains tax exemption on the sale of the family home

Buying and/or selling one’s home is probably one of the most important decisions that one will have to make in his life. This is especially true for us Filipinos as the family home is considered the culmination of one’s lifetime efforts and accomplishments. More than that, a home is the place where we nurture and build relationships, hence, efforts to make it comfortable and suitable for the family will necessarily entail costs. As this also involves the investment of a huge amount of money, and will definitely tie up a person’s finances for many years, it would only be prudent to be aware of the tax treatment for these kinds of transactions.

Generally, a tax of six percent based on the selling price or fair market value of the property, whichever is higher, is imposed on the presumed gain derived by individuals on the sale of real property. 

An exception is when the property involved is the principal residence and its proceeds of the sale are utilized in acquiring or constructing a new principal residence. The exemption, however, may be availed of only once every 10 years.  

There are three conditions attending the exemption: (1) the property sold must be the principal residence; (2) there must be full utilization of the proceeds within 18 calendar months from the date of sale of the property; and (3) the documentary requirements provided in the pertinent Revenue Regulations are complied with.

1. Principal residence. The principal residence is defined as the dwelling house, including the land on which it is situated, where the husband and wife or an unmarried individual and members of his/her family reside. This definition is similar to that of a family home under the Family Code of the Philippines, but unlike in the Family Code, no actual occupancy of the family home is necessary for the structure to be considered the “principal residence,” and make the tax exemption applicable. Also, for purposes of the tax exemption, the principal residence is not considered abandoned or interrupted due to travel or studies or work abroad. In other words, the principal residence is generally characterized by permanency, that is, the place to which, whenever absent for business or pleasure, one still intends to return.

Needless to say, an individual can only have one principal residence at any given time. 

2. Proceeds fully utilized within 18 months. For the tax exemption to apply, the proceeds from the sale of the principal residence must be used for the purpose of acquiring or constructing a new principal residence. Any other use of the said proceeds would make the gains from the sale of the principal residence subject to tax. Full utilization of the proceeds is also vital in availing of the tax exemption. If the funds are not fully utilized, the individual-seller will be liable for deficiency capital gains tax on the gains corresponding to the unutilized portion, inclusive of 20 percent interest per annum, computed from the 31st day after the date of sale of the old principal residence. Another aspect of this condition is the period of time within which to utilize the proceeds from the sale of the principal residence. The proceeds from sale must be fully utilized within 18 months from the date of sale of the old principal residence, otherwise, the individual-seller will be liable for capital gains tax.

3. Documentary requirements. The seller-individual has the obligation to submit the complete documentary requirements to be able to avail of the tax exemption.

To prove that positive action was undertaken to utilize the proceeds for the acquisition or construction of the new principal residence within the required period, the seller-individual must submit to the concerned Revenue District Officer (RDO) an affidavit attesting to the full utilization of the proceeds within thirty (30) days after the lapse of the 18-month period, a copy of the Building Permit, and a certified statement from his/her architect or engineer showing the cost of materials and labor for the construction of the new principal residence, or, in case the house is acquired by purchase, a copy of the Deed of Sale. Failure to submit these documents will create the presumption that the proceeds were not fully used up and the seller-individual will most likely be assessed for deficiency capital gains tax plus interest.

Revenue Regulations (RR) No. 13-99, as amended by RR No. 14-00, require the execution of an escrow agreement. The six percent capital gains tax which would have been due to the government had it not been for the tax exemption must be deposited in an interest-bearing account with a Bureau of Internal Revenue (BIR)-Authorized Agent Bank (AAB) under an Escrow Agreement between the concerned RDO, the seller-individual and the AAB. The terms in the Agreement must be such that the amount so deposited, including the interest, will be released to the seller-individual only upon certification by the RDO that the proceeds of the sale has in fact been utilized in the acquisition or construction of a new principal residence within 18 calendar months from the date of sale. The RDO will release the Escrow on the AAB upon a showing by the seller-individual that the proceeds of the sale have been fully utilized.

Also, while the seller-individual may not be required to pay the capital gains tax, he/she is required to file a Capital Gains Tax Return (BIR Form No. 1706) covering the sale of the principal residence with the concerned RDO within 30 days from the date of sale. Supporting documents such as the affidavit of the Barangay Chairman attesting to the fact of residency of the seller-individual, the deed of sale, proof of payment of the documentary stamp tax, the Transfer Certificate of Title (or Condominium Certificate of Title), tax declaration, and the building or occupancy permit must accompany the tax return.

The exemption from capital gains tax on the sale of the principal residence is really a huge tax-saving measure that Filipinos could benefit from. Having the entire proceeds of the sale used solely for one’s own benefit, without having to allocate for payment of taxes is certainly an incentive worth availing of. Given the present economic situation, we should take full advantage of this exemption granted by law to maximize utilization of one’s sources.

(Veronica Jude E. Abarquez is an assistant manager for tax and corporate services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email [email protected] or [email protected]).