In the Philippine tax landscape, the sale of a principal residence is generally subject to a 6% Capital Gains Tax (CGT) based on the gross selling price or the fair market value, whichever is higher. However, the National Internal Revenue Code (NIRC), specifically under Section 24(D)(2), provides a significant tax relief for individuals who intend to reinvest the proceeds of such a sale into a new home.
Governed primarily by Revenue Regulations (RR) No. 13-99 (as amended by RR No. 14-00), this exemption is not automatic. It requires strict adherence to specific timelines and administrative conditions.
I. Essential Conditions for Exemption
To qualify for the exemption from the 6% CGT, the following "Requisites for Exemption" must be met:
- Natural Persons Only: The seller must be an individual (citizen or resident alien). Corporations and other entities are not eligible.
- Principal Residence: The property sold must be the seller’s principal residence—the dwelling house where the individual and their family reside.
- Reinvestment Period: The full proceeds of the sale must be utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition.
- The "Once Every 10 Years" Rule: This tax privilege can only be availed of once every ten (10) years.
- Notice to the BIR: The Commissioner of Internal Revenue must be notified through a prescribed process (typically involving a Sworn Declaration) of the intent to avail of the exemption within 30 days from the date of sale.
- Historical Cost Basis: The historical cost or adjusted basis of the old residence sold shall be carried over to the new principal residence.
II. The Escrow Mechanism
The Bureau of Internal Revenue (BIR) does not simply waive the tax upfront based on a promise. To ensure compliance, the 6% CGT is typically deposited in an Escrow Account with an Authorized Agent Bank (AAB).
- The Process: Upon the sale of the old residence, the 6% CGT is computed and deposited into an escrow account.
- Release of Funds: Once the taxpayer successfully acquires or constructs the new residence within the 18-month window and submits proof to the BIR, a Certificate of Exemption is issued. This allows the bank to release the escrowed amount back to the taxpayer.
- Failure to Reinvest: If the 18-month period lapses without reinvestment, the escrowed money is applied as payment for the CGT, including any interests or penalties.
III. Partial Reinvestment and Computation
If the entire proceeds from the sale are not fully utilized for the new residence, the exemption is applied proportionately. The portion of the gain presumed to have been realized from the sale is subject to tax.
The formula for the tax due on partial reinvestment is:
For example, if a house is sold for ₱10M (with a CGT of ₱600,000) but only ₱8M is used for the new house, the tax due on the ₱2M unutilized portion will be computed and deducted from the escrow.
IV. Documentary Requirements
To formalize the claim for exemption, the taxpayer must generally submit the following to the Revenue District Office (RDO):
- Sworn Declaration of intent to avail of the tax exemption.
- Proof of Principal Residence (e.g., Barangay Certification, utility bills under the taxpayer's name).
- Escrow Agreement with an Authorized Agent Bank.
- Final Deed of Sale of the old residence.
- Deed of Absolute Sale or Construction Cost documents for the new residence (submitted after acquisition/construction).
V. Consequences of Non-Compliance
Failure to meet the 18-month deadline or the failure to submit the required "Post-Reinvestment" documents results in the assessment of the 6% Capital Gains Tax plus:
- 25% Surcharge (for late payment).
- Deficiency Interest (based on the prevailing rate under the TRAIN Law).
Summary Table
| Feature | Requirement |
|---|---|
| Taxpayer Type | Individual (Citizen or Resident Alien) |
| Timeline | Reinvest within 18 months |
| Frequency | Once every 10 years |
| Tax Rate | 6% (Escrowed/Exempted) |
| Scope | Principal Residence only |