Paolo entered into a Contract to Sell with Suga Land, Inc. (Suga Land) for the purchase of a three-bedroom penthouse located in Rockwell, Makati…

Explanation

The National Internal Revenue Code requires the payment of capital gains tax on the sale or transfer of real property, and such tax must be paid on the date the return is filed by the person liable, usually the seller. The law also requires that no registration of the transfer of real property shall be effected by the Register of Deeds unless the Commissioner certifies that the tax has been paid. However, the Supreme Court in Chua v. Court Of Appeals clarified that while the capital gains tax is a liability of the seller and must be paid, payment of the tax is not a pre-requisite to the actual transfer of ownership between the parties. Ownership transfers upon the signing and notarization of the deed of sale or assignment. The registration of the sale and issuance of a new title are necessary to protect the buyer against third parties but do not affect the ownership between the original parties. The buyer and seller may agree on who pays the tax and when, but the government holds the seller liable for the tax.

Application to the facts

Paolo, as the original buyer and assignor of the Contract to Sell, is the person liable for the capital gains tax on the assignment of his rights to Andres. However, the payment of the capital gains tax is not a condition for the transfer of ownership rights between Paolo and Andres. The requirement by Suga Land that Paolo pay the 6% capital gains tax before recognizing Andres as the new buyer and recording him in their system is a procedural condition imposed by the developer, not a legal prerequisite for the assignment's validity. Paolo and Andres may agree on the payment terms of the capital gains tax, and Paolo remains liable for it. The tax must be paid when the return is filed, but Paolo is not compelled to pay it before Suga Land recognizes the assignment. The transfer of ownership rights under the Contract to Sell takes effect upon the notarized Deed of Assignment, regardless of the tax payment. The developer's policy requiring tax payment before recognition is separate from the legal effect of the assignment.