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  • Writer's pictureZiggurat Realestatecorp

Taxability of sale of real property classified as ordinary asset

“Between income taxes and employment taxes, capital gains taxes, estate taxes, corporate taxes, property taxes, Social Security taxes, we’re being taxed to death,” said Chuck Norris, an American actor and all-too-familiar subject of Internet memes.


Lightening this obligation—or burden, perhaps to most taxpayers—may necessitate the uniform application of tax laws and regulations, as sought in the Bureau of Internal Revenue’s (BIR) Revenue Memorandum Circular (RMC) No. 99-2023.


Published on Oct. 3, 2023, the RMC aims to clarify applicable taxes due on the sale of real properties, considered as the seller’s ordinary assets, as well as other relevant matters.


Under the circular, real properties shall be considered ordinary assets when they are specifically excluded from the definition of capital assets under Section 39 (A)(1) of the National Internal Revenue Code (NIRC), as amended.


Ordinary assets may be:

(a) properly included in the taxpayer’s inventory if on hand at the close of the taxable year;

(b) held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;

(c) used in trade or business, such as buildings and/or their improvements, which are subject to allowance for depreciation pursuant to the NIRC;

(d) otherwise used in the taxpayer’s trade or business; or

(e) in the case of banks, those acquired through foreclosure sale.


While comprising the government’s inventory primarily held for sale, real properties seized by it and eventually sold through public auction shall not be considered as such ordinary assets.


Sellers of real properties classified as such assets must issue a sales invoice in accordance with Section 237 of the NIRC, as amended. Nevertheless, a Value-Added Tax (VAT)-registered taxpayer solely engaged in the sale of service may issue an official receipt covering the sale of its real property used in its trade or business since it is merely incidental to its regular business operations.


The sale of the concerned property shall form part of gross sales if the seller is registered to be conducting real estate business. Otherwise, the sale shall not be part of gross sales, while the gain from it shall be declared as other taxable income in the seller’s income tax return (ITR).


This gain is computed by deducting the book value of the real property from the selling price indicated in the sales invoice. Any creditable tax withheld by the buyer shall be claimed as tax credit.


In selling real properties classified as ordinary assets, the seller must file the corresponding tax returns on the remittance of expanded withholding tax on the purchase of real property and the declaration and payment of the documentary stamp tax due on such sale, which are BIR Form Nos. 1606 and 2000-OT, respectively.


As a general rule, sales of real property classified as ordinary assets are subject to VAT. This rule does not apply, however, when: (a) the real property is used in business by a Non-VAT registered person, which is engaged in transactions as defined under the NIRC, as amended; (b) the real property sold is utilized for socialized housing as defined under Republic Act No. 7279, as amended; and (c) the house and lot and other residential dwellings have a selling price of not more than PhP3,199,200.00, which amount shall be adjusted to its present value once every three years, based on the Consumer Price Index as published by the Philippine Statistics Authority.


If the sale is subject to the 12 percent VAT, the taxable base shall be the gross selling price or gross value in money of the real property sold. For this purpose, “gross selling price” shall mean the consideration stated in the sales document or the fair market value (FMV), whichever is higher. Meanwhile, the FMV shall mean whichever is higher of the zonal value determined by the BIR Commissioner or the value as shown in the schedules of values in the provincial or city assessors’.


Donations by a VAT-registered person of real properties classified as ordinary assets used in its trade or business shall be considered transactions “deemed sale” pursuant to the NIRC, as amended. If the donor is not a VAT-registered person, then the donation is exempt from VAT.


Source: Inquirer

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