Real Property Sale Obligations: Who Pays Registration and Capital Gains Tax

The sale of real property in the Philippines involves more than just signing a deed. Questions often arise about who bears the cost of registration, who must clear the property of occupants, and who pays the capital gains tax. In Vive Eagle Land, Inc. v. Court of Appeals (G.R. No. 150308, November 26, 2004), the Supreme Court clarified these obligations, distinguishing between what the Civil Code requires of a vendor and what the tax code imposes on corporations.

The Facts of the Case

The case involved a chain of sales over two parcels of land in Quezon City. The original owners, the Spouses Flores, sold the properties to Tatic Square International Corporation (TATIC) in April 1988. TATIC then sold the same properties to Vive Eagle Land, Inc. (VELI) the following day. Later that year, VELI sold one of the lots to Genuino Ice Co., Inc.

The parties executed several agreements along the way. A Memorandum of Agreement assigned certain obligations to the original owners and a broker, including paying capital gains tax and evicting occupants. An addendum between VELI and Genuino allowed Genuino to withhold P300,000 of the purchase price until VELI cleared the property of squatters.

When Genuino demanded that VELI register the sale, pay capital gains tax, and evict the occupants, VELI refused. Genuino sued for specific performance and damages.

The Issue

The Supreme Court had to resolve three main questions: whether VELI was obliged to pay for the registration of the sale and transfer of title; whether VELI was liable for capital gains tax; and whether VELI was obliged to evict the occupants from the property.

The Ruling: Vendor Bears Registration Expenses

The Court held that under Article 1487 of the Civil Code, the expenses for the execution and registration of a sale are borne by the vendor unless the parties agree otherwise. Since the deed of sale between VELI and Genuino contained no stipulation on registration costs, the default rule applied. VELI, as vendor, had to shoulder these expenses.

The Court also cited Article 1495, which obliges the vendor to transfer ownership and deliver the thing sold. While states that a notarized deed of sale is equivalent to delivery, this rule does not apply when the contrary appears from the deed. Here, the parties clearly contemplated that the property still had occupants, so delivery had not yet been effected.

The Ruling: Eviction of Occupants

VELI argued that it had assigned its rights under earlier contracts to Genuino, including the right to demand eviction from the original sellers. The Court rejected this argument. The assignment of rights produced no effect against third persons because it was not in a public instrument or recorded in the Registry of Property, as required by Article 1625 of the Civil Code.

More importantly, the addendum between VELI and Genuino expressly required VELI to clear the property of squatters before receiving the withheld P300,000. This contractual obligation remained binding regardless of any assignment of rights.

The Ruling: No Capital Gains Tax for Corporations

The Court then addressed the capital gains tax question. At the time of the 1988 sale, the applicable law was the 1977 National Internal Revenue Code, as amended by Batas Pambansa Blg. 37. Under (h) of that law, the final capital gains tax on sales of real property applied only to individuals, not corporations.

VELI, being a corporation, was therefore not liable for capital gains tax on its sale to Genuino. The Court noted that the Bureau of Internal Revenue had consistently ruled that corporations were exempt from this tax and instead treated their gains from property sales as ordinary income subject to corporate income tax.

The Court rejected the Court of Appeals' reliance on (D) of the 1997 National Internal Revenue Code, which imposes a 6% capital gains tax on corporations. That law took effect only on January 1, 1998, and could not be applied retroactively to a 1988 sale.

Practical Takeaways

• Registration expenses default to the vendor. Unless the contract says otherwise, the seller pays for the execution and registration of the deed of sale under Article 1487 of the Civil Code.
• A notarized deed does not always mean delivery. If the property is occupied and the parties know it, the execution of the deed may not constitute actual delivery.
• Assignments of rights must be properly documented. An assignment that is not in a public instrument or recorded in the Registry of Property cannot bind third persons.
• Tax laws apply prospectively. The tax rules in effect at the time of the sale govern, not later amendments.
• Corporations were historically exempt from capital gains tax. Under the 1977 NIRC, only individuals paid this tax; corporate gains were treated as ordinary income.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.