Interests Paid on Loan Obtained for Purchase of Land Should be Treated as Expense in the Period When Incurred

February 27, 1996 BIR RULING NO. 028-96 29 (b) 000-00 028-96 JBK Properties, Inc. C-234 Alexandra Condominium 29 Meralco Avenue Pasig, Metro Manila Attention: Ms . Susan Yu Treasurer Gentlemen : This refers to your letter dated January 17, 1995 stating that you are a newly established real estate company that purchased a property in 1994 which is 50% financed by a bank; that at present, you do not have any operations; and that upon each renewal of the loan, you have to pay interest to the bank. Based on the foregoing, you now request our opinion on whether or not your interest paid monthly, registration fees, documentary stamps and transfer fee which were paid when the property was purchased form part of the cost of the land. In reply, please be informed as follows: 1. When land is acquired on the installment plan or credit financing, the interest element or carrying charge should be charged as interest expense and not as part of the cost of the asset. However, incidental cost in the purchase of lands such as commissions to real estate brokers, escrow fees, legal fees for examining and insuring the title, delinquent taxes paid, and fees for surveying, draining, clearing, etc., form part of the cost of the land. (Meigs & Meigs, Financial Accounting, 3rd., McGraw Hill Book Co., 1980). 2. The interest or financing cost should be treated as expense during which credit was extended, (H.A. Black, J.E. Champion, R.G. Brown, Accounting in Business Decisions, 2nd ed., Prentice Hall, Inc. Englewood Cliffs, J.J., p. 190); and should be amortized over the credit period (ASC-Compilation of Statements of Financial Accounting Standards Nos. 1-22, pp. 137-138). 3. Interest expense, in this case should not be classified as deferred charges in the form of pre-operating expense. Normally, pre-operating expenses include only organizational cost, research and development cost and other expenses relative to the organization of the company (E. L. Kohler, Dictionary for Accountants, 5th ed., Prentice Hall, Inc., Englewood Cliffs, N. J., 1975). Accordingly, this Office is of the opinion as it hereby holds that interests paid on loan obtained for the purchase of the land should neither be treated as pre-operating expense nor part of the cost of the land but rather as expense in the period when incurred. On the other hand, registration fees, documentary stamps and transfer fees should form part of the cost of the land acquired. aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue