Tax Alert No. 28 [Revenue Memorandum Circular (RMC) No. 99-2023 dated 03 October 2023]

Clarifications on the Applicable Taxes Due on Sale of Real Property Considered as Ordinary Assets of the Seller and Other Relevant Matters.

RMC No. 99-2023 was issued to have a uniform application of tax laws and regulations pertaining to the transfer/sale of real properties classified as "ordinary assets” across all offices that process electronic Certificate Authorizing Registration. The issues and concerns are addressed in a question and answer format and we provide the following salient points thereof:

1. Real properties considered "ordinary assets", as provided in Revenue Regulations No. 7-2003, shall refer to all "real properties" specifically excluded from the definition of capital assets under Section 39(A)(1) of the NIRC, as amended. These include:
   • 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
   • Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or
   • 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
   • Real properties used in trade or business of the taxpayer; or
   • In the case of banks, real properties acquired through foreclosure sale.
2. Real properties seized by the government in the exercise of its regulatory functions that were eventually sold through public auction are not considered "ordinary assets” although they are part of the "inventory" primarily held for sale.
3. Only sellers of real properties classified as "ordinary assets" are 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.
4. If the seller's registered business is "real estate business", the sales shall form part of its gross sales. If not, the sale of real property, though covered by a sales invoice, shall not form part of the gross sales. However, the gain on the sale of such real property shall be declared as other taxable income. It is computed by deducting the book value of the real property from the selling price indicated in the sales invoice. Any creditable tax withheld (CWT) by the purchaser shall be claimed as tax credit.
5. The copy of BIR Form No. 1606 with proof of payment of the CWT shall be attached to the income tax return where the sales were declared by the seller to prove its claim for tax credit.
6. The parties to the sale/transfer transaction involving real properties considered as "ordinary assets" are required to file the following tax returns:
   • BIR Form No. 1606 for the remittance of expanded withholding tax on the purchase of real property; and
   • BIR Form No. 2000-OT for the declaration and payment of the documentary stamp tax due on the transfer/sale of real property.
7. Generally, sales of real property classified as "ordinary assets" are subject to VAT. However, the following are instances when they are not subject to VAT:
   • When the real property is used in business by a "Non-VAT Registered Person", whose transactions are under Section 109(1)(A) to (BB) of the Tax Code, as amended; or
     
   • When the real property subject of sale/transfer falls under Section 109 (P) of the NIRC, as amended (i.e ., sale of real property utilized for socialized housing as defined by Republic Act No. 7279, as amended; sale of house and lot and other residential dwellings with the selling price of not more than P 3,199,200 as periodically adjusted.
8. The twelve percent (12%) VAT shall be based on the "gross selling price or gross value in money of the goods or properties sold, bartered or exchanged". The "gross selling price" shall mean the consideration stated in the sales document or the fair market value, whichever is higher. The term "fair market value" shall mean whichever is the higher of (a) fair market value as determined by the Commissioner, or (b) the fair market value as shown in the schedules of values in the Provincial or City Assessors.
9. Donation of an “ordinary asset” used in business by a VAT-registered person shall be considered transaction "deemed sale", hence, subject to VAT if the donor-taxpayer is a VAT-registered person, Otherwise, iIf the donor-taxpayer is not a VAT registered person, the donation is exempt from VAT. Further, if the real property donated is still being used in the operation of the business of the taxpayer or originally intended for use in business, the classification of the real property after the donation remains to be "ordinary asset".

You may access the full version of this issuance through the BIR website.

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