Tax Consequences of Certain Real Property Sales Transactions

July 3, 2002 BIR RULING NO. 027-02 RR 6-2001 Sentosa Park Property Development Corporation 1760 Evangelista cor. Macabulos Sts., Bangkal, Makati City Attention: Ms. Flordeliza S. Manuel Executive Assistant Gentlemen : This refers to your letter dated September 3, 2001 requesting for a ruling on the tax consequences of the following sales transactions: 1. Sale of a real estate property wherein the seller and the buyer are both corporations and are engaged in real estate business. Both corporations are issued a certification by the Housing & Land Use Regulatory Board (HLURB) to that effect. The seller has also been issued a License to Sell by the HLURB; 2. Sale of real estate property by a corporation engaged in real estate business to another corporation not engaged in real estate business. The corporation engaged in real estate business, being the seller, is issued a certification by the HLURB to that effect. The seller has also been issued a License to Sell by the HLURB; 3. Sale of a real estate property by a corporation not engaged in real estate business to another corporation engaged in real estate business; and 4. Sale of real estate property by a corporation engaged in real estate business to individual buyer. The corporation engaged in real estate business, being the seller, is issued a certification by the HLURB. The seller has also been issued a License to Sell by the HLURB. In reply, please be informed of the following: It is noted that, except for No. 3, the situations you presented involve a seller that is engaged in real estate business. However, you did not specify in each of these instances, whether the property being sold is an ordinary asset or a capital asset in the hands of the seller. It is necessary to first determine the character of the real property being sold. Thus, if the real property is a land or building which is not actually used in the business of the seller-corporation and is treated as a capital asset, as that term is defined in Section 39 (A) of the 1997 Tax Code, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher of such land and/or building. This rule applies, whether or not the seller-corporation is engaged in real estate business. [Sections 27 (D) (5); 1997 Tax Code]. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, shall apply. The rate of withholding tax will depend on whether, first, the seller is exempt or taxable; second, whether the seller is habitually engaged in real estate business or not; and third, if the seller is habitually engaged in real estate business, the gross selling price, as that term is defined in the above-mentioned Revenue Regulations. Based on the foregoing discussion, and on the assumption that the seller in each case is not exempt, we rule as follows on each situation in the same order as they are presented above. 1. Section 2.57.2 of Revenue Regulations No. 2-98, as amended, provides that where the seller is a corporation duly registered with the HLURB as habitually engaged in the real estate business, a creditable withholding tax based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the 1997 Tax Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset , shall be deducted by the withholding agent/buyer, in accordance with the following schedule: A. Where the seller/transferor is exempt from creditable withholding tax in accordance with Sec. 2.57.5 of these Regulations Exempt B. Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business: With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less 1.5% With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not more than Two Million Pesos (P2,000,000.00) 3.0% With a selling price of more than Two Million Pesos (P2,000,000.00) 5.0% 2. The above tax treatment shall likewise apply in cases where the seller-corporation is habitually engaged in the real estate business, even if the buying corporation is not engaged in real estate business. 3. As stated earlier, Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended, applies only in cases where the real estate property is an ordinary asset. Thus, if the property is an ordinary asset, since the seller is not habitually engaged in the real estate business, the rate of creditable withholding tax is six percent (6%) of the gross selling price as provided in Section 3(J) of Revenue Regulations No. 6-2001. On the other hand, if the real property is land or building which is not actually used in the business of the seller-corporation, and is treated as a capital asset, 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 land and/or building pursuant to Section 27 (D) (5) of the Tax Code of 1997; and 4. Section 2.57.2 of Revenue Regulations No. 2-98, as amended by Section 3 of Revenue Regulations No. 6-2001, provides that where the seller-corporation who is habitually engaged in the real estate business sell real property/ies held as ordinary asset to an individual not engaged in trade or business , the following rules shall apply: (i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the selling price), no withholding of tax is required to be made on the periodic installment payments. In such a case, the applicable rate of tax based on the gross selling price or fair market value of the property, whichever is higher, shall be withheld on the last installment or installments to be paid to the seller until the tax is fully paid. (ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment" sale not on the installment plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross selling price or fair market value of the property, whichever is higher, on the first installment. However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply: (i) If the sale is a sale of property on the installment plan (that is payments in the year of sale do not exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every installment. (ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross selling price or fair market value of the property, whichever is higher, on the first installment. For purposes of applying the foregoing rules, "gross selling price" shall mean the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Tax Code of 1997, whichever is higher. Finally, registration with the HLURB or HUDCC shall be sufficient for a seller/transferor to be considered as habitually engaged in the real estate business. If the seller/transferor is not registered with HLURB or HUDCC, he/it may prove that he/it is engaged in the real estate business by offering other satisfactory evidence (for example, he/it consummated during the preceding year at least six taxable real estate transactions, regardless of amount). Please be guided accordingly. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue