Mr. H decided to sell the house and lot wherein he and his family have lived for the past 10 years, hoping to buy and move to a new house and lot closer to his children’s school. Concerned about the capital gains tax that will be due on the sale of their house, Mr. H approaches you as a friend for advice if it is possible for the sale of their house to be exempted from capital gains tax and the conditions they must comply with to avail themselves of said exemption. How will you respond? (4%)
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Yes, the sale of Mr. H's house and lot may be exempted from capital gains tax. As a natural person selling his principal residence, he can avail of the statutory exemption. Under Sec. 24(D)(2), NIRC, capital
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Quick check
What is the capital gains tax exemption granted under Section 24(D)(2) of the NIRC applicable to?
Section 24(D)(2) grants tax exemption on sales of principal residences by natural persons.
Within what period must sales proceeds be fully utilized to acquire a new principal residence for tax exemption?
Proceeds from the sale must be reinvested in a new principal residence within eighteen calendar months.
Within how many days from the sale must a taxpayer notify the BIR to claim the principal residence exemption?
The seller must notify the Bureau of Internal Revenue within thirty calendar days from the date of sale.
How frequently may an individual taxpayer avail of the capital gains tax exemption on the sale of a principal residence?
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What happens if a seller only partially utilizes the sales proceeds to acquire a new principal residence within 18 months?
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Learn more about these topics
1. Principal Residence Exemption
Under Section 24(D)(2) of the National Internal Revenue Code, capital gains derived from the sale or disposition of a principal residence by a natural person who is a citizen or resident alien are exempt from six percent capital gains tax. A principal residence refers to the dwelling house and surrounding land where an individual and their family actually reside on a permanent basis. This tax incentive aims to assist families in relocating or acquiring suitable housing without incurring capital gains tax liabilities on the disposition of their family home.
2. Statutory Reinvestment Period
To qualify for capital gains tax exemption under Section 24(D)(2) of the Tax Code, the taxpayer must fully utilize the entire gross selling price or fair market value derived from the sale to acquire or construct a new principal residence. This statutory reinvestment must be completed within eighteen calendar months from the date of disposition. If only a portion of the proceeds is reinvested in a new principal residence, the remaining unutilized balance is subject to six percent capital gains tax proportional to the unutilized sales proceeds.
3. Mandatory Compliance Conditions
Taxpayers seeking tax-exempt treatment for the sale of a principal residence must satisfy procedural administrative conditions prescribed by the Bureau of Internal Revenue. The seller must formally notify the Commissioner of Internal Revenue of the intent to avail of the tax exemption within thirty calendar days from the date of sale. Furthermore, the historical cost basis of the old principal residence is carried over to the new property, and this statutory tax exemption can be exercised by an individual taxpayer only once every ten calendar years.