QuestionsQuestions (BIR REGULATIONS NO. 7-2003)
It provides guidelines in determining whether a particular real property is a capital asset or an ordinary asset for purposes of imposing the correct tax (capital gains tax or ordinary income tax, and related rules including MCIT).
All real properties held by a taxpayer, whether or not connected with his trade or business, that are not included among the real properties considered ordinary assets under Section 39(A)(1) of the NIRC.
(1) Stock in trade or real property properly includible in the inventory if on hand at year-end; (2) real property held primarily for sale to customers in the ordinary course of trade or business; (3) real property used in trade/business (buildings and/or improvements) of a character subject to depreciation under Sec. 34(F); (4) real property used in the trade/business of the taxpayer.
They are considered the banks’ ordinary assets; however, banks are not considered habitually engaged in the real estate business for purposes of determining the applicable rate of withholding tax under Sec. 2.57.2(J) of RR No. 2-98, as amended.
It largely determines the classification of real property as ordinary versus capital assets, with special rules for real estate dealers, developers, lessors, taxpayers habitually engaged, and taxpayers not engaged.
All real properties acquired by a real estate dealer are considered ordinary assets.
All real properties acquired (developed or undeveloped) are ordinary assets, including those developed or field primarily for sale/lease to customers in the ordinary course, those included in inventory at year-end, and all real properties used in the trade/business (land, buildings, improvements).
All real properties of the lessor (land and/or improvements) that are for lease/rent, being offered for lease/rent, or otherwise for use/used in the trade/business are ordinary assets.
The taxpayer may be deemed engaged through substantial relevant evidence, such as consummation during the preceding year of at least six (6) taxable real estate sale transactions (regardless of amount), registration as habitually engaged with the LGU or BIR, among other evidence.
Real properties used or previously used in the taxpayer’s trade/business are ordinary assets, including depreciable assets and lands used in the trade/business.
No. A depreciable asset does not lose its character as an ordinary asset even if fully depreciated or if depreciation was not taken during ownership.
No. Monetary consideration and presence/absence of profit are not significant; and a property purchased for future business use does not lose ordinary-character even if later use is thwarted by circumstances beyond the taxpayer’s control.
If not used in trade/business as evidenced by a certification from the Barangay Chairman (and additional validation for condominium/townhouse/apartment from existing available BIR records), the property is treated as a capital asset.
No. The change of business or amendment of primary purpose does not result in reclassification of real properties from ordinary to capital assets.
They continue to be treated as ordinary assets; real properties initially acquired by a taxpayer engaged in real estate business do not become capital assets even if abandoned or idle.
When proof is shown that they have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving the properties.
No. For involuntary transfers, the involuntariness has no effect on classification in the hands of the involuntary seller; however, the classification in the hands of the buyer/transferee follows the rules under the transfer-related section.
Capital assets: subject to a 6% capital gains tax (Sec. 27(D)(5)) based on gross selling price or FMV, whichever is higher. Ordinary assets (and other real property other than those treated as capital assets): subject to creditable withholding tax (expanded) leading to ordinary income tax or possibly MCIT under the applicable provisions.
A 6% capital gains tax under Sec. 25(B) in relation to Sec. 24(D)(1), based on gross selling price or FMV (Sec. 6(E)), whichever is higher.