Ms. Geraldine Garcia Benedictos

July 19, 2007 BIR RULING [DA-395-07] R.R. 7-2003 DA-012-2006 Ms. Geraldine Garcia Benedictos 18-A Villa Socorro St. Toro Hills, Quezon City M a d a m : This refers to your letter dated May 9, 2007 stating that your client, Jennifer Rose Po is the owner of two (2) condominium units, described as follows: 1) CCT No. 45503, Unit No. 2415 with an area of 39.82 square meters located on the twenty-fourth floor of the Herrera Towers in Valero Street, Salcedo Village, Makati City, and 2) CCT No. 45505, Unit No. 2423 with an area of 23.44 square meters also located on the twenty-fourth floor of the Herrera Towers. The above-described properties were bought for investment purposes on November 4, 1996 at the height of the property boom and prior to the financial crisis of 1997 which caused the property market to crash. The subject units have been idle and not used in business by the owner who is neither a real estate developer nor a real estate dealer, but are now being offered for sale for Forty Thousand Pesos (P40,000.00) per square meter and the owner would like to be apprised that the foregoing properties are classified as capital assets and not ordinary assets. You are of the opinion that since the above condominium units are merely held for investment purposes and have been idle and vacant, it follows that the said properties should be classified as capital assets and therefore subject only to the 6% capital gains tax and not subject to the 12% VAT. In reply, please be informed that Section 39 (A) (1) of the Tax Code of 1997 defines a capital asset as: acHDTE ". . . property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other 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 property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer." For a property to be considered as a capital asset, it must not be used, or is not being used in the business of the person selling the property. The herein properties of Ms. Po are deemed capital assets considering that the latter is not engaged in the business of selling or development of real estate. The foregoing case of BIR Ruling 234-92 dated August 27, 1992, would find application in the case at hand, where this Office held that: ". . . since the land is not used in business by either of the owners but is being held as an investment by all the co-owners, the land is considered a capital asset." Corollarily, only such real properties held primarily for sale to customers in the ordinary course of business, or which would be properly included in the inventory of such taxpayer, if on hand at the close of the taxable year, or used in his/her trade or business are appropriately classified as ordinary assets. Otherwise stated, real properties other than those enumerated under Section 39 (A) (1) of the Tax Code of 1997 and Section 2 (b) of Revenue Regulations No. 7-2003 will be properly treated as capital assets. cSTDIC Considering that the 2 condominium units have long been idle and have never been used in the business by Ms. Jeniffer Rose Po, and do not fall under any of the assets enumerated under Sections 39 (A) (1) of the Tax Code of 1997 and 2 (b) of Revenue Regulations No. 7-2003, the same should be properly classified as capital assets for tax purposes. Accordingly, this Office hereby confirms your opinion that the sale of the above-mentioned condominium units which have remained idle and considered as capital assets is subject to the capital gains tax of 6% pursuant to Section 24 (D) (1) of the Tax Code of 1997 and to the corresponding documentary stamp tax at the rate of P15.00 for each P1,000.00, or fractional part thereof in excess of P1,000.00, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 of the same Tax Code, but is exempt from 12% VAT, the property not being primarily held and offered for sale to customers in the ordinary course of business, as provided under Section 109 (w) of the 1997 Tax Code, as amended. It should be emphasized however, that in the event that the subject properties had been leased or in any manner offered for rent, the intended sale of the herein described condominium units shall be subject to the creditable withholding tax under Section 2.57.2 (J) of Revenue Regulations No. 2-98, as amended, and consequently to the ordinary income tax under Section 24 (A) (1) (a) of the 1997 Tax Code. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner