Petronilo S. Santos & Co.

July 12, 2007 BIR RULING [DA-376-07] Petronilo S. Santos & Co. Certified Public Accountants Suite 410 Pasda Mansion 77 Panay corner Timog Avenue Quezon City Attention: Philip B. Santos Managing Partner Gentlemen : This refers to your letter dated April 16, 2007 requesting, on behalf of your client Lora Enterprises, Inc . (LEI), for a ruling on whether or not the property located at 1559 Carissa Street, Dasmarias Village, Makati City, is classified as an ordinary or capital asset pursuant to the Tax Code, as amended. It is represented that LEI is the owner of a real property covered by Transfer Certificate No. 156576 in the Register of Deeds of Makati City. As shown in the Financial Statement, LEI acquired the property for investment purposes only and the same was not used in its trade or business nor held primarily for sale to customers in the ordinary course of trade or business. It is now your position that the above property should be classified as capital asset. aASEcH In reply, please be informed that Capital Assets refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not considered among the real properties considered as ordinary assets under Sec. 39 (A) (1) of the Code (Section 2 (a), Revenue Regulations [RR] 7-2003) . On the other hand, Ordinary Assets refer to all real properties specifically excluded from the definition of capital assets under Sec. 39 (A) (1) of the Code, namely: 1. Stock in trade of the 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 the trade or business, (i.e. buildings and/or improvements) of a character which is subject to the allowance for depreciation provided in Section 34 (F) of the Code; or 4. Real property used in trade or business of the taxpayer. (Section 2 (a), RR 7-2003). SEDaAH Based on your representations, it is the opinion of his Office that the above property of LEI is properly treated as capital asset, therefore the sale of the same shall be subject to 6% capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997, which provides: "Sec. 27. Rates of Income Tax on Domestic Corporation. Capital Gains Realized from the Sale, Exchange, or Disposition of Lands and/or Buildings. A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings." ITSCED In BIR Ruling No. DA-219-2005 dated May 5, 2005, it was held that whenever a corporate-real estate developer sells real properties forming part of its inventory or those primarily held for sale to customers, it is considered as a sale of ordinary assets subject to the 32% income tax. However, when the real estate involved is idle, raw, undeveloped, has never formed part of the real estate developer's inventory for sale to customers and has not been used in its trade or business, such real properties are properly classified as capital asset subject to a final tax of 6% on the gain presumed to have been realized from the sale or transfer pursuant to Section 27 (D) (5) of the Tax Code of 1997, as amended. From the foregoing, the above-mentioned real property of LEI is, therefore, properly considered as its capital asset. Lastly, since the property is considered as capital asset, the sale thereof will not be subject to the 12% value-added tax of the Tax Code of 1997, as amended by R.A. No. 9337. However, it will be subject to the 1.5% documentary stamp tax imposed under Section 196 of the same Code, as amended by R.A. No. 9243. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service