Guidelines on Real Property Asset Classification

Capital assets: Real properties held by taxpayers not included as ordinary assets
Ordinary assets: Real properties excluded by law, including inventory, properties for sale to customers, depreciable business properties, and properties used in trade or business
Real property: As defined in Civil Code, includes land, buildings, and improvements
Real estate dealer: Person buying and selling real estate as principal
Real estate developer: Person developing real properties into subdivisions or constructing units for sale or lease
Real estate lessor: Person leasing out real properties as principal
Taxpayers engaged in real estate business: Dealers, developers, lessors, and those with primary business purpose in real estate
Taxpayers not engaged in real estate business: Others excluding above

Real estate dealers’ properties considered ordinary assets
Real estate developers’ properties (developed or undeveloped), including leased, sale inventory and business properties classified as ordinary assets
Real estate lessors’ leased properties are ordinary assets
Taxpayers habitually engaged in real estate sales classified as ordinary asset holders
Registration with HLURB or HUDCC is proof of habitual engagement
Transaction evidence can establish habitual engagement
Properties retain ordinary asset classification despite future non-use or discontinuation of use

Real properties used or previously used in trade or business are ordinary assets
Includes depreciable buildings and improvements, even if fully depreciated or no depreciation claimed
Use for business is key, irrespective of profit or consideration
Properties used by tax-exempt corporations are capital assets
Residential properties not used in business evidenced by local certification treated as capital assets

Changing from real estate business to non-real estate does not reclassify ordinary assets as capital assets
BIR officers must verify amendments to Articles of Incorporation to establish business classification

Properties remain ordinary assets even if a taxpayer registered as real estate business does not operate subsequently

Properties previously used or held as ordinary assets continue to be ordinary assets even if abandoned or idle
Exception: Non-real estate business properties unused for over two years can convert to capital assets with proof

Heirs or donees not engaged in real estate business treat inherited or donated property as capital assets
Stockholders receiving property dividends not engaged in real estate business treat these as capital assets
Properties received in tax-free exchanges to taxpayers engaged in real estate or business use treated as ordinary assets

Classification as capital or ordinary asset in hands of involuntary transferor is not affected by involuntariness
Foreclosed properties of real estate dealers are ordinary assets for taxation
Classification in buyer's hands follows general rules for buyers

Tax depends on asset classification and type of taxpayer
Individual citizens, estates, trusts, resident aliens engaged in trade: six percent capital gains tax on capital assets; ordinary income tax and withholding tax on ordinary assets
Non-resident aliens not engaged in trade: six percent capital gains tax on capital assets
Domestic corporations: six percent capital gains tax on capital assets; withholding and ordinary income tax or MCIT on ordinary assets
Resident foreign corporations: withholding tax and ordinary income or MCIT tax
Non-resident foreign corporations: 32% final withholding tax
Gains from properties outside the Philippines taxed as ordinary income for residents; exempt for non-residents

Existing inconsistent BIR rulings and regulations are modified, repealed, or revoked

Regulations effective 15 days after publication in Official Gazette or newspaper of general circulation