Selling the family home

Q. "It’s mixed emotions that I feel, now that my wife and I have finally reached that phase of our married life where all of our children have settled down and have their own families. We now find ourselves left alone in a modest house that was a taciturn but 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 advice 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."

A.Your letter left me melancholic. I 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 where some were realized. Life, as we experience it, is becoming different and difficult and we now have to look and give more weight to the practical side of things.

Before I get philosophical about life, let me inform you that the tax code 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 Bureau of Internal Revenue.

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 are the following: 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 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 of the house.

Not so fast now! This exemption is not given outright as you would be required to first deposit, in cash or in manager’s check, the 6% capital gains tax otherwise due on the sale in an interest-bearing account with an authorized agent bank under an escrow agreement to be entered between you, the concerned revenue district officer, and the authorized agent bank. Under the escrow agreement, the amount to be deposited, including its interest yield, will 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 concerned RDO within 30 days from the lapse of the 18 calendar months from the date of sale the following post-reporting requirements: 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 bank deposit will 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 the 30 days following the end of the 18-month acquisition period, you fail to submit the documentary evidence required above, the concerned RDO will initiate an 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, on the one hand, the escrowed amount is insufficient to cover the entire amount assessed, you are liable for the remaining balance of the assessment. If, on the other hand, the escrowed amount is more than the entire amount assessed, the 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.

(Raymund S. Gallardo is tax partner of Laya Mananghaya & Co./KPMG. Questions and comments are welcome. Messages to the author can be sent by e-mail at [email protected]).