The first step to knowing the tax implications of a sale of a real property is to determine whether the real property is a capital asset or an ordinary asset. Ordinary assets are either (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; or(4) Real property used in trade or business of the taxpayer. All other properties that are not considered as ordinary assets are considered as capital asset (Sec. 39 (A) (1), NIRC,1997). For example, real properties previously rented when sold will be considered as ordinary assets as real property used in trade or business. Specifically, under existing revenue regulations, real properties acquired by banks through foreclosure sales are considered as ordinary assets. (Sec. 2 (b) of RR No. 7-2003).
For simplicity, for any of the different types of transactions to be discussed below, the tax base is based on the gross selling price or current fair market value as determined by whichever is higher of (1) The fair market value as determined by the Commissioner; or (2) ) The fair market value as shown in the schedule of values of the Provincial and City Assessors (Tax Base) (Section 6 (E), NIRC, 1997). For documentary stamp tax (DST), if the Government is a party, the basis shall be the selling price. We tabulate the differences, as follows:
| Capital Asset | Ordinary Asset |
| The Tax Base is subject to a final tax of six percent (6%), this includes pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts (Section 24 (D), NIRC, 1997). | The Tax Base is subject to a creditable withholding tax with a rate of 1.5% to 6% to be paid to the seller/owner for the sale, (Section 2 (F), RR 11-2018) |
| The sale shall not form part of the gross sales. | The sale 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). |
| Not subject to VAT | If the Seller is VAT registered or with gross annual receipts of more than P3M, the sale of the real property is subject to VAT. On the other hand, the following are VAT Exempt transactions (1) Sale of properties by non-VAT-registered persons, the gross annual sales and/or receipts of which does not exceed the amount of Three Million Pesos (P3,000,000.00) (RR 13-2018). (2) Sale of House and lot and other residential dwellings valued at Two Million Pesos (P2, 000, 000.00) and below as adjusted in 2011 and 2010 Consumer Price Index (3) Sale of real property utilized for socialized housing as defined by R.A. No. 7279, as amended. (RR No. 4-2021). |
| In case the seller is an individual, required to issue Acknowledgement Receipt. In the case if the seller is a Corporation, should still issue a Sales Invoice. However, in case of a VAT-registered taxpayer who is engaged solely in sale of service, as a consequence thereof, has only Authority to Print for Official Receipt (OR), the issuance of an OR covering the sale of its real property used in trade or business is permitted as the sale is merely incidental to its regular business operations. (RMC 99-2023) | Required to issue Sales Invoice pursuant to Section 237 of the NIRC, as amended. However, in case of a VAT-registered taxpayer who is engaged solely in sale of service, as a consequence thereof, has only Authority to Print for Official Receipt (OR), the issuance of an OR covering the sale of its real property used in trade or business is permitted as the sale is merely incidental to its regular business operations. (RMC 99-2023) |
| Declared as Income Subject to Final Tax. | If the seller’s registered business is “real estate business”, the sales shall form part of its gross sales. Otherwise, the sale of real property, though covered by a sales invoice, shall not form part of the gross sales, but the gain on the sale of such real property shall be declared as other taxable income which shall be declared in the seller’s income tax return. The 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 purchaser shall be claimed as tax credit. RMC 99-2023) |
| Use BIR Form No. 1706, Capital Gains Tax Return for the onerous transfer of real property. The return shall be filed and paid within thirty (30) days following the sale, exchange or disposition of real property, with any Authorized Agent Bank (AAB) of the Revenue District Office (RDO) having jurisdiction over the place where the property being transferred is located. | Use BIR Form No. 1606, Withholding Tax Remittance Return to be filed on the tenth (10) day following end of the month in which the transaction occurred with any Authorized Agent Bank (AAB) of the Revenue District Office (RDO) having jurisdiction over the place where the property being transferred is located. The said return will be attached to the ITR along with the proof of payment of the Creditable Withholding Tax. |
| The DST due on the sale is at the rate of P1.50 for every P200 or fractional part thereof, the BIR form to be used is BIR Form No.2000-OT for the declaration and payment of the documentary stamp tax due on the sale. The return shall be filed and the tax paid close of the month when the taxable document was made, signed, issued, accepted or transferred. The return shall be filed with and the tax paid to the Authorized Agent Bank (AAB) within the territorial jurisdiction of Revenue District Office (RDO) where the seller/transferor/donor is required to be registered or where the property is located in case of sale of real property. | The DST due on the sale at the rate of P1.50 for every P200 or fractional part thereof, the BIR form to be used is BIR Form No.2000-OT for the declaration and payment of the documentary stamp tax due on the sale. The return shall be filed and the tax paid close of the month when the taxable document was made, signed, issued, accepted or transferred. The return shall be filed with and the tax paid to the Authorized Agent Bank (AAB) within the territorial jurisdiction of Revenue District Office (RDO) where the seller/transferor/donor is required to be registered or where the property is located in case of sale of real property. |
This guide provides a general overview of the above transactions at the time of writing only and is not intended to be a comprehensive legal advice. This should also not be taken as an opinion on the topic. For more details and information, you may coordinate with any GVES Law Partner regarding the matter.
Atty. Ludanielle N. Legarde is a Partner of GVES Law.