The Covid-19 pandemic is now slowly becoming part of our forgotten history. Also slowly, real estate companies such as developers, dealers and lessors, are now gaining their momentum to have a steadier recovery and growth. With the more relaxed movement of people, real properties are now valued more as commercial establishments are busier. Having said this, knowing the proper taxes and tax compliance requirements on transactions surrounding real property has become the essential business aspect of real estate companies.
In this article, let us tackle the tax rules applicable to sale of real property considered as “ordinary assets”.
Definition of real property, real estate dealer and real estate developer
Real property under Revenue Regulations (RR) No. 7-2003 follows the definition under Article 415 of the Civil Code of the Philippines which enumerates ten items of real property, among of which is a land, building, roads and construction of all kinds adhered to the soil, and everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the materials or deterioration of the object.
On the other hand, a real estate dealer is defined by RR No. 7-2023 as any person engaged in the business of buying and selling or exchanging real properties and holding himself out as a full or part-time dealer in real estate. While a real estate developer is any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and the like for his own account and offering them for sale or lease.
VAT-exempt sale of real property
Not all sale of real property is subject to value-added tax (VAT). In RR No. 1-2024, which amended RR No. 8-2021, it provides that the sale of (a) real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business; (b) real property utilized for socialized housing; and (c) house and lot, and other residential dwellings, with a selling price of not more than Three Million Six Hundred Thousand (P3,600,000.00) effective 01 January 2024, is VAT-exempt.
Sale of real property subject to VAT, taxable base and invoicing requirements
Revenue Memorandum Circular (RMC) No. 99-2023 provides that generally, sales of real property classified as “ordinary assets” are subject to VAT (except for the transactions mentioned in the preceding part of this article).
Real properties considered ordinary assets include the following: (a) Stock in trade of a taxpayer or other real 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 (b) Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or (c) Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided under Sec. 34 (F) of the National Internal Revenue Code (NIRC) of 1997, as amended; or (d) Real properties used in trade or business by the taxpayer.
Further, donation by a VAT-registered person of a real property used in the course of business of the donor-taxpayer and donation by a VAT-registered person of a real property originally intended for use in business are classified as deemed sales of real properties classified as ordinary assets and hence shall also be subject to VAT.
The VAT, which is equivalent to 12%, shall be based on the gross sales. The definition of gross sales under the Ease of Paying Taxes (EOPT) Act means the total amount of money or its equivalent value in money which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the VAT. The excise tax, if any, on such goods or properties shall form part of the gross sales.
RR No. 99-2023, in relation to RR No. 16-2005, provides that the 12% VAT on the sale of real property shall be based on the gross selling price of the property which is the consideration stated in the sales document or the fair market value (FMV), whichever is higher. The FMV is the higher of the zonal value and assessed value.
For VAT purposes, sale of real property is classified into installment sale or deferred sale plan which remain unchanged by the EOPT Act. It is considered a sale on installment plan if the initial payment in the year of sale does not exceed 25% of the gross selling price, otherwise it is considered a deferred-payment basis.
In installment sale, the seller is required to recognize the output VAT on every installment payment, actually and/or constructively received, including interest and penalties. Correspondingly, the buyer can claim the input tax in the same period as the seller recognized the output tax.
In deferred-payment basis, the sale is considered as cash sale hence, the seller is required to recognize the output tax on the entire selling price in the month of sale and the input tax shall accrue to the buyer at the time of sale. Relatively, any subsequent payment will no longer be subject to VAT.
Seller of real properties classified as “ordinary assets” are required to issue Sales Invoice. The same shall apply to VAT-registered taxpayer who is engaged solely in sale of service but sells its real property used in trade or business pursuant to EOPT Act.
Reporting of sale in the Income Tax Return (ITR)
RMC No. 99-2023 states that if the seller’s registered business with the BIR is real estate business, the sales shall form part of its gross sales reported in the ITR. Otherwise, the sale, despite the issuance of a sales invoice shall not form part of the gross sales, but the gain on such sale of real property shall be declared as other taxable income in the ITR. The gain is computed by deducting the book value of real property from the selling price indicated in the SI. Any creditable tax withheld by the purchase shall be claimed as tax credit.
The copy of BIR Form No. 1606 with proof of payment of the Creditable Withholding Tax shall be attached to the ITR where the sales were declared by the seller.
Other tax returns required to be filed
The buyer of the real property shall file BIR Form No. 1606 for the remittance of expanded withholding tax on the purchase of such real property, and BIR Form No. 2000-OT shall be filed by either of the parties for the declaration and payment of the documentary stamp tax (DST) due on sale/transfer of real property.
RPVARA (Republic Act No. 12001)
Last June 2024 Republic Act No. 12001 or the Real Property Valuation and Assessment Reform Act (RPVARA) was signed into law. As a summary, this Act prioritizes the adoption and implementation of the Philippine Valuation Standard (PVS). The PVS aims to ensure uniformity in valuing real properties for taxation and other purposes. The law also mandates the market value as the single valuation base for assessment, eliminating inconsistencies arising from different valuation methods.
With the enactment of the RPVARA, the BIR is no longer in the position to determine the zonal value of real properties for internal revenue tax purposes. This is now transferred to local assessors who are required to adopt the PVS to ensure uniform valuation of real properties. In this note, it is expected that the valuation of real properties will now be uniform and easier as this will be determined via the PVS. Hence, the computation of Capital Gains Tax and DST on sale of real property has now uniform basis.
The law also grants a real property tax amnesty for unpaid real property taxes, including penalties, surcharges and interests. Property owners who want to avail the amnesty may choose either a one-time payment or installment payment of delinquent taxes within two years after the law’s effectivity.
Takeaways
The sale of real property is considered to have special tax compliance rules. Hence, with the changes introduced by EOPT and RPVARA, we may expect new regulations to be issued by the BIR to ease the processing of related taxes for real properties and assist the real estate industry with its steady growth.
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 01 October 2024
