Question & AnswerQ&A (BIR REGULATIONS NO. 7-2003)
The primary purpose of BIR Regulations No. 7-2003 is to provide guidelines in determining whether a particular real property is a capital asset or an ordinary asset pursuant to Section 39(A)(1) of the National Internal Revenue Code of 1997 for the purpose of imposing capital gains tax, ordinary income tax, or minimum corporate income tax.
Capital assets refer to all real properties held by a taxpayer, whether or not connected with his trade or business, which are not included among the real properties considered as ordinary assets under Section 39(A)(1) of the Code.
Ordinary assets include real properties that are stock in trade, held primarily for sale to customers in the ordinary course of business, used in trade or business subject to depreciation, or otherwise used in the taxpayer's trade or business. Real properties acquired by banks through foreclosure are also considered ordinary assets.
Taxpayers engaged in the real estate business include real estate dealers, real estate developers, and real estate lessors. A taxpayer whose primary purpose stated in their articles of incorporation is to engage in the real estate business is also deemed engaged in the real estate business.
All real properties acquired by a real estate dealer shall be considered as ordinary assets.
All real properties acquired by a real estate developer, whether developed or undeveloped, and those held primarily for sale or lease in the ordinary course of business, including properties used in trade or business, are considered ordinary assets.
All properties of a real estate lessor offered for lease or rent or used in the trade or business are considered ordinary assets.
The change of business or amendment of the primary purpose does not reclassify real property from an ordinary asset to a capital asset. Properties remain ordinary assets despite the change.
Yes. Real properties previously used in trade or business or part of stock in trade, when abandoned or idle, continue to be treated as ordinary assets, except for certain conditions on properties of taxpayers not engaged in real estate business if unused for more than two years prior to sale.
If the heir or donee is not engaged in real estate business and does not use the property in trade or business, the real property is considered a capital asset in their hands.
Capital gains on sale of capital assets by individual citizens are subject to a six percent (6%) capital gains tax based on the gross selling price or current fair market value, whichever is higher.
Sales of ordinary assets by individual citizens are subject to expanded withholding tax based on the gross selling price or fair market value, and then to ordinary income tax based on net taxable income.
Involuntary transfers do not affect the classification of the property as capital or ordinary asset in the hands of the involuntary seller. Properties of real estate dealers foreclosed are treated as ordinary assets for tax purposes.
The classification may change in the hands of the buyer or transferee depending on how the property will be used or the buyer’s engagement in real estate business, following specific rules provided in the regulations.
These regulations take effect fifteen (15) days after publication in the Official Gazette or a newspaper of general circulation.