Distinction Between a Sale of Real Property on the Installment Plan and a Sale on a Deferred-Payment Basis, Not on the Installment Plan

August 31, 1988 BIR RULING NO. 422-88 42 034-70 422-88 Gentlemen : This refers to your letter dated June 4, 1988 stating as follows: "Pacific Plaza, Inc. (PPI for short) is a domestic corporation engaged in the construction, development, and sale of condominium units. It has an existing project along Ayala Avenue, Makati, Metro Manila which is a forty-three (43) storey condominium building, the construction of which is estimated to be finished within three (3) years. "While the said condominium building is under construction, PPI intends to pre-sell the condominium units therein at prices based on cost estimates made by its architects and engineers. Upon the signing of the Contract to Sell, PPI receives from the buyer the corresponding down payments and periodically, thereafter receives amortization payments from said buyers. These down payments and amortizations made by its respective buyers would in the initial year, total more than twenty five (25%) percent of the selling price. "The true and correct cost per condominium unit can be exactly determined only at the time of its completion when the full construction cost shall had been computed; hence, PPI would wish to treat, whatever payments made by its buyers as income only at the time of delivery that the cost is definitely established." In connection therewith, you now request a ruling as to whether or not PPI can treat whatever payments made by its buyers as income only at the time of the delivery of said condominium units because it is from that time that the cost can be definitely established. In reply thereto, please be informed that your request is answered in the negative. Section 42(b) of the Tax Code, as amended provides, viz: "SEC. 42. Installment Basis . (a) xxx xxx xxx "(b) Sales of realty and casual sales of personal property . In the case of (1) a casual sale or other casual disposition of personal property (other than 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), for a price exceeding one thousand pesos, or (2) if a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent of the selling price, the income may under regulations prescribed by the Secretary of Finance, be returned on the basis and in the manner above prescribed in this section. As used in this section the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made." Generally, income from the sale of real property may be reported either on the installment basis or on the deferred payment basis, not on the installment plan. The basic distinction between a sale of real property on the installment plan and a sale on a deferred-payment basis, not on the installment plan, lies on the amount of "initial payments" received by the seller. The sale is on the installment plan if the initial payments in the year of sale do not exceed twenty-five percent (25%) of the selling price. If the initial payments in the year of sale exceed twenty-five percent (25%) of the selling price, then the sale is on the deferred-payment basis, not on the installment plan. (Sec. 175, Revenue Regulation No. 2) The term "initial payments" is defined to mean payments received in cash or property other than evidence of indebtedness of the purchaser during the taxable year in which the sale or other disposition is made. This term must not be equated with what is commonly called "down payment" because its meaning is much broader than that. While it covers any down payment made, it goes further and includes all payments actually or constructively received during the year of sale. (Gertrude H. Sweet, 8 BTA 404; Cortland Specialty Co., 22 BTA 808) And the aggregate of all such payments determines whether or not the limit which the law has set has been exceeded. (See BIR Ruling No. 70-034 dated June 29, 1970) Since the aggregate initial payments in the year of sale is in excess of 25% of the selling price of the condominium unit, the gain realized from the said sale should be reported on a deferred payment method, not on the installment plan. In other words, the taxable gain or income returnable during the year of sale is the difference between the selling or contract price and the cost of the condominium unit, determined in accordance with Section 34(a) and (b) of the Tax Code, as amended even though the entire purchase price have not been actually received in the year of sale since in a sale on a deferred payment basis, not on the installment plan, "the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash." (Sec. 177, Revenue Regulations No. 2) Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner