Hopeful Corporation obtained a loan from Generous Bank and executed a mortgage on its real property to secure the loan. When Hopeful Corporation failed to pay the loan, Generous Bank extrajudicially foreclosed the mortgage on the property and acquired the same as the highest bidder. A month after the foreclosure, Hopeful Corporation exercised its right of redemption and was able to redeem the property. Is Generous Bank liable to pay capital gains tax as a result of the foreclosure sale? Explain. (4%)
Suggested answer only. Not an official answer and not legal advice.
No, Generous Bank is not liable to pay capital gains tax as a result of the foreclosure sale. Under RR No. 4-99 and Supreme Transliner, Inc. v. BPI Family Savings Bank, Inc., capital gains tax on a foreclosure sale
Unlock the full Commercial and Tax Law answers365 days of full access. GCash, Maya and card accepted.
This is not an official scoring system and carries no weight with the Supreme Court or any bar review provider. It measures how much of the suggested answer's wording your response covers, not whether your reasoning is correct. For practice only.
Quick check
When does capital gains tax accrue on an extrajudicial foreclosure sale of real property?
Capital gains tax on foreclosure sales accrues only after the lapse of the redemption period without redemption.
What is the legal effect when a mortgagor exercises the right of redemption within the statutory period?
Redemption restores title to the mortgagor, preventing title transfer and defeating capital gains tax accrual.
Under Revenue Regulations Number 04-99, who is responsible for paying capital gains tax if real property is not redeemed?
The purchaser or foreclosing creditor pays capital gains tax upon title consolidation after the redemption period expires.
Why is a mortgagee bank not liable for capital gains tax if the mortgagor redeems the foreclosed property?
Choices available with full access.
What document triggers the statutory one-year redemption period in extrajudicial foreclosure of mortgage?
Choices available with full access.
Learn more about these topics
1. Taxability of Foreclosures
Under Revenue Regulations Number 04-99 and Philippine tax jurisprudence, capital gains tax or withholding tax on extrajudicial foreclosure sales of real property does not accrue immediately upon the sale. During the statutory one-year redemption period granted to the mortgagor, title to the foreclosed real property does not consolidate in the purchaser. Because title transfer remains conditional upon the expiration of the redemption period without redemption being exercised, no taxable gain or taxable disposition of real property is realized by either party during the equity or statutory redemption period.
2. Effect of Redemption
When a mortgagor exercises the statutory right of redemption within the prescribed period, the extrajudicial foreclosure sale is rendered ineffective regarding the permanent transfer of title. The redemption restores ownership to the mortgagor as if no foreclosure sale occurred. Consequently, because no final transfer of ownership or title consolidation takes place in favor of the purchaser, no capital gains tax liability accrues against the foreclosing mortgagee bank or the highest bidder.
3. Tax Accrual Timing
Capital gains tax on foreclosure sales becomes due and payable only after the lapse of the statutory redemption period without the mortgagor exercising the right of redemption. Upon the expiration of the redemption period without redemption, title consolidates in the purchaser, and the final deed of sale is executed. Only at this point does the transaction become a taxable event requiring the payment of capital gains tax and documentary stamp tax within the statutory deadlines following the expiration of the redemption period.