Introduction

In the Philippine real estate market, "pasalo" transactions have become a common practice, particularly for condominium units under installment payment schemes. Derived from the Filipino term meaning "to pass on" or "to transfer," pasalo involves the assignment of rights and obligations under a Contract to Sell (CTS) or similar agreement from the original buyer to a new party before full payment and title transfer. While this offers flexibility for buyers facing financial constraints or seeking quick exits, it triggers significant tax implications, chief among them the Capital Gains Tax (CGT). This article provides an exhaustive examination of CGT as applied to condo pasalo transactions within the Philippine legal and tax framework. It covers the conceptual foundations, statutory provisions, computational mechanics, exemptions, procedural compliance, penalties for non-compliance, relevant jurisprudence, and practical considerations. The discussion is grounded in the National Internal Revenue Code (NIRC) of 1997 (Republic Act No. 8424, as amended, particularly by the Tax Reform for Acceleration and Inclusion or TRAIN Law under Republic Act No. 10963), Bureau of Internal Revenue (BIR) regulations, and related laws, ensuring a comprehensive guide for taxpayers, real estate professionals, and legal practitioners.

Understanding Pasalo Transactions

Definition and Nature

A pasalo transaction typically occurs in pre-selling or under-construction condominium projects where the developer sells units via a CTS. Under a CTS, the buyer pays in installments, gaining possession or equitable interest but not legal title until full payment. The pasalo happens when the original buyer (assignor) transfers their rights, interests, and remaining obligations to a new buyer (assignee). This is formalized through an Assignment of Contract to Sell or Deed of Assignment, often requiring developer consent to novate the agreement.

Pasalo is distinct from a outright sale of titled property. It is not a conveyance of ownership but an assignment of contractual rights, which may include paid installments, reservation fees, and future payment schedules. Common in condos due to high demand and speculative investments, pasalo allows assignors to realize gains from property appreciation without waiting for completion. However, the Bureau of Internal Revenue (BIR) treats this as a disposition of a capital asset, subjecting it to CGT.

Legal Framework for Pasalo

Civil Code Provisions: Articles 1311 and 1624-1627 govern assignments of credits and contracts. The assignment must be consensual, notified to the debtor (developer), and not contrary to law or the original contract.
Real Estate Laws: Republic Act No. 6552 (Maceda Law) protects installment buyers, allowing refunds or grace periods, but does not directly address taxation. Presidential Decree No. 957 (Subdivision and Condominium Buyers' Protective Decree) requires developer approval for assignments to ensure project integrity.
Tax Perspective: The NIRC classifies real property rights under CTS as capital assets. BIR Revenue Regulations (RR) No. 7-2003 and Revenue Memorandum Circular (RMC) No. 5-2017 clarify that assignments of CTS for real property are taxable events akin to sales.

Pasalo can be "dry" (no cash exchange beyond assignment) or involve additional consideration (e.g., premium for equity paid). In either case, if there's a gain, CGT applies.

Capital Gains Tax: Legal Basis and Applicability

Statutory Provisions

Section 24(D) and 27(E) of the NIRC: Imposes a 6% CGT on the gain from the sale or other disposition of real property classified as a capital asset, based on the gross selling price, fair market value (FMV), or zonal value, whichever is highest. This applies to individuals and domestic corporations.
TRAIN Law Amendments: Effective January 1, 2018, the rate remains 6%, but the base is strictly the higher of selling price or BIR zonal value/ local assessor's FMV. Exemptions for principal residences were retained with stricter conditions.
BIR Rulings on Pasalo: RMC No. 39-2008 and RMC No. 5-2017 explicitly state that the assignment of a CTS constitutes a "sale or exchange" under Section 24(D). The assignor is liable for CGT on the difference between the consideration received (including assumed obligations) and the assignor's basis (e.g., payments made to developer).

For condos, the property is considered "real property" even if untitled, as the CTS conveys interest in immovable property. If the assignor is engaged in real estate business (e.g., habitual assignments), the transaction may shift to ordinary income tax (up to 32% for individuals) and VAT (12%), per RR No. 16-2005.

When CGT Applies in Pasalo

Taxable Event: Triggered upon execution of the assignment deed, regardless of full payment by assignee.
Parties Liable: Primarily the assignor (seller of rights). The assignee may withhold the tax if acting as withholding agent under RR No. 2-98.
Non-Applicability: If no gain (e.g., assignment at cost), no CGT, but DST still due. Corporate assignors (e.g., developers) may face different rules under Section 27.

Computation of Capital Gains Tax

Formula and Base

CGT = 6% × Tax Base
Where Tax Base = Higher of:

Gross Selling Price (GSP): Total consideration received by assignor, including cash, assumed installments, and other benefits.
BIR Zonal Value: As per latest BIR valuation at assignment date.
Local Government FMV: From the Schedule of Market Values.

Determining Gain

Actual Gain = GSP - Adjusted Basis
Adjusted Basis = Original acquisition cost (payments to developer) + incidental expenses (e.g., notarial fees, commissions) - any refunds.
However, CGT is final and withholding, computed on the tax base, not the actual gain—hence, even loss transactions may incur tax if base exceeds basis.

Example Computation

Assume an assignor bought a condo unit for PHP 5,000,000 under CTS, paid PHP 2,000,000, with PHP 3,000,000 remaining. Assigns to assignee for PHP 2,500,000 cash (equity premium) + assumption of PHP 3,000,000.
GSP = PHP 2,500,000 + PHP 3,000,000 = PHP 5,500,000.
Zonal Value = PHP 6,000,000.
Tax Base = PHP 6,000,000.
CGT = 6% × PHP 6,000,000 = PHP 360,000.
Assignee withholds and remits this via BIR Form 1606.

Related Taxes

Documentary Stamp Tax (DST): 1.5% on GSP under Section 196, NIRC.
Value-Added Tax (VAT): 12% if assignor is VAT-registered or in trade; exempt if casual.
Local Transfer Tax: Up to 0.75% of GSP, per Local Government Code.
Creditable Withholding Tax (CWT): 1.5%-6% on certain transactions, but CGT supersedes for capital assets.

Exemptions and Relief Measures

Statutory Exemptions

Principal Residence Exemption (Section 24(D)(2)): No CGT if proceeds are used to acquire or construct a new principal residence within 18 months. Requires BIR Certificate Authorizing Registration (CAR) and escrow of proceeds if not fully utilized. Strict: Must be individual's/family's actual home, not investment property. BIR Ruling DA-131-2004 clarifies application to CTS assignments.
Corporate Reorganizations: Tax-free under Section 40(C)(2) if part of mergers.
Socialized Housing: Exempt under Republic Act No. 7279 if below price ceilings.

Conditional Relief

Installment Sales: If GSP receivable in installments, CGT prorated under Section 49 if initial payments ≤25% of GSP.
Loss Carryover: Not applicable to CGT, as it's final tax.

Non-residents (aliens/corporations) face 6% CGT, no exemptions.

Compliance Procedures

Steps for Tax Payment

Secure Developer Consent: Obtain no-objection certificate.
Execute Assignment Deed: Notarize; pay DST.
Compute and Withhold CGT: Assignee files BIR Form 1606 within 30 days of transaction.
Obtain CAR: BIR issues after verification, necessary for LCR/developer to record assignment.
Report in ITR: Assignor includes in annual Income Tax Return (ITR) if applicable.
Local Taxes: Pay to city/municipal treasurer.

Electronic filing via eBIRForms mandatory for most taxpayers.

Penalties for Non-Compliance

Administrative and Criminal Sanctions

Surcharges and Interest: 25% surcharge for late payment, plus 12% annual interest under Section 249.
Compromise Penalties: PHP 1,000-PHP 50,000 for violations like non-withholding.
Criminal Liability: Willful evasion punishable by fines (PHP 10,000-PHP 100,000) and imprisonment (2-6 years) under Section 255.
BIR Assessments: Deficiency taxes via Letter of Authority audits.

RMC No. 23-2020 emphasizes strict enforcement on real estate transactions.

Jurisprudence and BIR Rulings

Key Cases

Commissioner of Internal Revenue v. Fort Bonifacio Development Corp. (G.R. No. 175707, 2012): Affirmed that assignments of property rights are taxable dispositions.
BIR Ruling No. 120-2015: Clarified CGT on CTS assignments, emphasizing zonal value base.
Court of Tax Appeals Cases: Various rulings uphold BIR's position that pasalo gains are capital gains, not ordinary income unless habitual.

During the COVID-19 period, BIR allowed extensions for filings via RMC No. 34-2020, but tax liability remained.

Practical Considerations and Risks

Risks for Parties

Assignor: Underreporting GSP leads to audits; ensure accurate valuation.
Assignee: Liability for unpaid taxes if not withheld; verify CAR before payment.
Developer: May be solidarily liable if facilitating untaxed pasalo.

Tax Planning Strategies

Structure as loan instead of assignment (risky, per BIR scrutiny).
Time assignments to qualify for exemptions.
Consult tax professionals for rulings.

Market Trends

Pasalo thrives in booming condo markets like Metro Manila, but economic downturns increase defaults, amplifying tax disputes.

Conclusion

Capital Gains Tax on condo pasalo transactions in the Philippines represents a critical intersection of real estate flexibility and fiscal responsibility. By treating assignments as taxable dispositions, the NIRC ensures revenue collection while providing exemptions for genuine needs. Taxpayers must navigate computations, procedures, and potential pitfalls meticulously to avoid penalties. As the real estate sector evolves, staying abreast of BIR issuances is essential. Ultimately, informed compliance not only mitigates risks but also supports equitable taxation in fostering sustainable property development. Parties involved in pasalo are advised to seek expert guidance to align transactions with legal requirements, ensuring both financial gains and regulatory adherence.