Gains Derived by Real Estate Dealers from Sale of Real Property Not Subject to Final Schedular Capital Gains Tax

October 9, 1985 BIR RULING NO. 180-85 34-h 70-034 180-85 Gentlemen : This refers to your letter dated August 28, 1985 requesting a ruling on the following: (1) Whether the gain derived by your clients, Augusto Barretto, et al. from the sale of their real estate property is exempt from the capital gains tax; and (2) Whether in computing the tax payable by your clients on the gain derived therefrom, the basis is the contract price when the Contract to Sell was executed in 1978. It is represented that your clients, Augusto Barretto, et al., who are real estate dealers sold certain lots in January, 1978 to Solid Homes, Inc., a domestic corporation engaged in the business of buying and selling of lots and developing subdivisions; that in the Contract to Sell executed by the parties, it is stipulated that the down payment is 2% of the total contract price payable upon execution of the Contract to Sell in January, 1978, and the balance is payable semi-annually in ten (10) equal installments starting July, 1978 up to January, 1983; that in July, 1978, 10% of the contract price corresponding to the 1st installment payment on the lots sold was paid by the vendee corporation; and that installments payable in 1981 to 1983 were paid by Solid Homes, Inc. only in 1985 plus interest for late payment. In reply thereto, I have the honor to inform you that since your clients-vendors are real estate dealers, the gains derived by them from the aforesaid sale of real property are not subject to the final schedular capital gains tax prescribed by Section 34(h) of the Tax Code, as amended by Batas Pambansa Blg. 37 and implemented by Revenue Regulations No. 8-79. If as represented, the aggregate initial payments in 1978, the year of sale did not exceed 25% of the selling price of the real property, then your clients should report their gain on the installment method. Under the installment methods, your clients are allowed to return as income for each of the taxable years during which the vendee-corporation will pay the purchase/contract price, a proportion of the installment payments actually received during each of such years, which the total/gross profit realized or to be realized when the property sold is fully paid bears to the total contract price (Sec. 175, Income Tax Regulations implementing Sec. 43, Tax Code). Accordingly, the gain or income derived by your clients from the aforesaid sale which is subject to the ordinary income tax rates prescribed by Section 21(b) of the Tax Code as amended by B.P. Blg. 135 shall be based on the total contract price stipulated in the Contract to Sell. cdt Very truly yours, (SGD.) TOMAS C. TOLEDO Acting Commissioner