BIR guide on real estate transactions classified as ordinary assets
In a study conducted by the Statista Research Department, the gross value added generated from the real estate industry in the Philippines reached approximately P536.4 billion as of 2022, fueled by a steady growth in the purchasing and investing power of Filipinos, particularly from overseas Filipino workers, in real estate properties.
In particular, the increase in real estate transactions classified as ordinary assets has brought up a common concern about the proper issuance of documentary support.
Just recently, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) 99-2023 to address clarifications on transfers or sales of real properties classified as ordinary assets and to have a uniform application of tax laws across all offices processing the electronic Certificate Authorizing Registration (e-CAR).
Real properties considered ordinary assets
Real properties considered ordinary assets include the following:
1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided under Sec. 34 (F) of the National Internal Revenue Code (NIRC) of 1997, as amended; or
4. Real properties used in trade or business by the taxpayer; or
5. In the case of banks, real properties acquired through foreclosure sale.
Further, real properties seized by the government in the exercise of its regulatory functions that were eventually sold through public auctions are not considered “stock in trade/inventory” in the ordinary course of trade or business, hence shall not be considered part of the government’s ordinary asset.
Issuance of sales invoice or official receipt
Sellers of real properties classified as ordinary assets are required to issue sales invoices pursuant to Section 237 of the NIRC, as amended.
However, the issuance of an official receipt covering the sale of real property used in trade or business is permitted for a VAT-registered taxpayer who is engaged solely in the sale of services and has only “Authority to Print for Official Receipt,” as the sale is merely incidental to its regular business operations.
If the seller’s registered business with the BIR is real estate business, the sales shall form part of its gross sales reported in the income tax return (ITR).
Otherwise, the sale, despite the issuance of a sales invoice or official receipt, shall not form part of the gross sales, but the gain on such sale of real property shall be declared as other taxable income in the ITR.
In addition to income tax, the sale of real properties classified as ordinary assets is also generally subject to value added tax (VAT) (except for the sale of real properties used in business by a non-VAT registered person).
Further, the following transactions are classified as deemed sales of real properties classified as ordinary assets and hence shall also be subject to VAT:
1. Donation by a VAT-registered person of a real property used in the course of business of the donor-taxpayer.
2. Donation by a VAT-registered person of a real property originally intended for use in business.
Finally, the buyer of the real property shall file BIR Form 1606 for the remittance of expanded withholding tax on the purchase of such real property, and BIR Form 2000-OT shall be filed by either of the parties for the declaration and payment of the documentary stamp tax due on sale/transfer of real property.
Please be guided accordingly.