REVENUE REGULATIONS NO.

07-03
SUBJECT :

Providing the Guidelines in Determining Whether a Particular

Real Property is a Capital Asset or an Ordinary Asset
Pursuant to Section 39(A)(1) of the National Internal Revenue
Code of 1997 for Purposes of Imposing the Capital Gains Tax
under Sections 24(D), 25(A)(3), 25(B) and 27(D)(5), or the
Ordinary Income Tax under Sections 24(A), 25(A) & (B),
27(A), 28(A)(1) and 28(B)(1), or the Minimum Corporate
Income Tax (MCIT) under Sections 27(E) and 28(A)(2) of the
same Code

TO

All Internal Revenue Officials and Others Concerned

SECTION 1.
Scope. Pursuant to Section 244 of the National Internal
Revenue Code of 1997 (Code), these Regulations are hereby promulgated to
implement Sec. 39(A)(1), in relation to Secs. 24(D), 25(A)(3), 25(B) and 27(D)(5),
and Secs. 24(A), 25(A) & (B), 27(A) or 27(E), 28(A)(1) or 28(A)(2), and 28(B)(1), all
of the said Code, providing for the purpose the guidelines in determining whether a
particular real property is a capital asset or an ordinary asset.
SECTION 2.
Definition Of Terms. For purposes of these Regulations,
the following terms shall be defined as follows:
a. Capital assets shall refer to all real properties held by a taxpayer, whether
or not connected with his trade or business, and which are not included among the
real properties considered as ordinary assets under Sec. 39(A)(1) of the Code.
b. Ordinary assets shall refer to all real properties specifically excluded
from the definition of capital assets under Sec. 39(A)(1) of the Code, namely:
1.

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

2.

Real property held by the taxpayer primarily for sale to customers

in the ordinary course of his trade or business; or

3.

Real property used in trade or business (i.e., buildings and/or

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improvements) of a character which is subject to the allowance for

depreciation provided for under Sec. 34(F) of the Code; or
4.

Real property used in trade or business of the taxpayer.

Real properties acquired by banks through foreclosure sales are considered as

their ordinary assets. However, banks shall not be considered as habitually engaged in
the real estate business for purposes of determining the applicable rate of withholding
tax imposed under Sec. 2.57.2(J) of Revenue Regulations No. 2-98, as amended.
c. Real property shall have the same meaning attributed to that term under
Article 415 of Republic Act No. 386, otherwise known as the "Civil Code of the
Philippines."
d. Real estate dealer shall refer to any person engaged in the business of
buying and selling or exchanging real properties on his own account as a principal and
holding himself out as a full or part-time dealer in real estate.
e. Real estate developer shall refer to 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 other similar units for
his own account and offering them for sale or lease.
f. Real estate lessor shall refer to any person engaged in the business of
leasing or renting real properties on his own account as a principal and holding
himself out as lessor of real properties being rented out or offered for rent.
g. Taxpayers engaged in the real estate business shall refer collectively to
real estate dealers, real estate developers, and/or real estate lessors. Conversely, the
term "taxpayers not engaged in the real estate business" shall refer to persons other
than real estate dealers, real estate developers and/or real estate lessors. A taxpayer
whose primary purpose of engaging in business, or whose Articles of Incorporation
states that its primary purpose is to engage in the real estate business shall be deemed
to be engaged in the real estate business for purposes of these Regulations.
SECTION 3.
Guidelines in Determining Whether a Particular Real
Property is a Capital Asset or Ordinary Asset.
a. Taxpayers engaged in the real estate business. Real property shall be
classified with respect to taxpayers engaged in the real estate business as follows:

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1.

Real Estate Dealer. All real properties acquired by the real

estate dealer shall be considered as ordinary assets.

2.

Real estate Developer. All real properties acquired by the real

estate developer, whether developed or undeveloped as of the time
of acquisition, and all real properties which are field by the real
estate developer primarily for sale or for lease to customers in the
ordinary course of his trade or business or which would properly
be included in the inventory of the taxpayer if on hand at the close
of the taxable year and all real properties used in the trade or
business, whether in the form of land, building, or other
improvements, shall be considered as ordinary assets.

3.

Real Estate Lessor. All real properties of the real estate lessor,
whether land and/or improvements, which are for lease/rent or
being offered for lease/rent, or otherwise for use or being used in
the trade or business shall likewise be considered as ordinary
assets.

4.

Taxpayers habitually engaged in the real estate business. All

real properties acquired in the course of trade or business by a
taxpayer habitually engaged in the sale of real estate shall be
considered as ordinary assets. Registration with the HLURB or
HUDCC as a real estate dealer or developer shall be sufficient for
a taxpayer to be considered as habitually engaged in the sale of
real estate. If the taxpayer is not registered with the HLURB or
HUDCC as a real estate dealer or developer, he/it may nevertheless
be deemed to be engaged in the real estate business through the
establishment of substantial relevant evidence (such as
consummation during the preceding year of at least six (6) taxable
real estate sale transactions, regardless of amount; registration as
habitually engaged in real estate business with the Local
Government Unit or the Bureau of Internal Revenue, etc.).

A property purchased for future use in the business, even though this purpose
is later thwarted by circumstances beyond the taxpayer's control, does not lose its
character as an ordinary asset. Nor does a mere discontinuance of the active use of the
property change its character previously established as a business property.
b.
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Taxpayer not engaged in the real estate business. In the case of a

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taxpayer not engaged in the real estate business, real properties, whether land,
building, or other improvements, which are used or being used or have been
previously used in the trade or business of the taxpayer shall be considered as
ordinary assets. These include buildings and/or improvements subject to depreciation
and lands used in the trade or business of the taxpayer.
A depreciable asset does not lose its character as an ordinary asset, for
purposes of the instant provision, even if it becomes fully depreciated, or there is
failure to take depreciation during the period of ownership.
Monetary consideration or the presence or absence of profit in the operation of
the property is not significant in the characterization of the property. So long as the
property is or has been used for business purposes, whether for the benefit of the
owner or any of its members or stockholders, it shall still be considered as an ordinary
asset. Real property used by an exempt corporation in its exempt operations, such as a
corporation included in the enumeration of Section 30 of the Code, shall not be
considered used for business purposes, and therefore, considered as capital asset
under these Regulations.
IHCDAS

Real property, whether single detached; townhouse; or condominium unit, not

used in trade or business as evidenced by a certification from the Barangay Chairman
or from the head of administration, in case of condominium unit, townhouse or
apartment, and as validated from the existing available records of the Bureau of
Internal Revenue, owned by an individual engaged in business, shall be treated as
capital asset.
c. Taxpayers changing business from real estate business to non-real estate
business. In the case of a taxpayer who changed its real estate business to a
non-real estate business, or who amended its Articles of Incorporation from a real
estate business to a non-real estate business, such as a holding company,
manufacturing company, trading company, etc., the change of business or amendment
of the primary purpose of the business shall not result in the re-classification of real
property held by it from ordinary asset to capital asset. For purposes of issuing the
certificate authorizing registration (CAR) or tax clearance certificate (TCL), as the
case may be, the appropriate officer of the BIR shall at all times determine whether a
corporation purporting to be not engaged in the real estate business has at any time
amended its primary purpose from a real estate business to a non-real estate business.
d. Taxpayers originally registered to be engaged in the real estate business
but failed to subsequently operate. In the case of subsequent non-operation by
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taxpayers originally registered to be engaged in the real estate business, all real
properties originally acquired by it shall continue to be treated as ordinary assets.
e. Treatment of abandoned and idle real properties. Real properties
formerly forming part of the stock in trade of a taxpayer engaged in the real estate
business, or formerly being used in the trade or business of a taxpayer engaged or not
engaged in the real estate business, which were later on abandoned and became idle,
shall continue to be treated as ordinary assets. Real property initially acquired by a
taxpayer engaged in the real estate business shall not result in its conversion into a
capital asset even if the same is subsequently abandoned or becomes idle.
Provided however, that properties classified as ordinary assets for being used
in business by a taxpayer engaged in business other than real estate business as
defined in Section 2(g) hereof are automatically converted into capital assets upon
showing of proof that the same have not been used in business for more than two (2)
years prior to the consummation of the taxable transactions involving said properties.
f. Treatment of real properties that have been transferred to a
buyer/transferee, whether the transfer is through sale, barter or exchange,
inheritance, donation or declaration of property dividends.
Real properties classified as capital or ordinary asset in the hands of the
seller/transferor may change their character in the hands of the buyer/transferee. The
classification of such property in the hands of the buyer/transferee shall be determined
in accordance with the following rules:
1.

Real property transferred through succession or donation to the

heir or donee who is not engaged in the real estate business with
respect to the real property inherited or donated, and who does not
subsequently use such property in trade or business, shall be
considered as a capital asset in the hands of the heir or donee.

2.

Real property received as dividend by the stockholders who are not

engaged in the real estate business and who do not subsequently
use such real property in trade or business shall be treated as
capital assets in the hands of the recipients even if the corporation
which declared the real property dividend is engaged in real estate
business.

3.

The real property received in an exchange shall be treated as

ordinary asset in the hands of the transferee in the case of a

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tax-free exchange by taxpayer not engaged in real estate business

to a taxpayer who is engaged in real estate business, or to a
taxpayer who, even if not engaged in real estate business, will use
in business the property received in the exchange.
g. Treatment of real property subject of involuntary transfer. In the case
of involuntary transfers of real properties, including expropriation or foreclosure sale,
the involuntariness of such sale shall have no effect on the classification of such real
property in the hands of the involuntary seller, either as capital asset or ordinary asset,
as the case may be.
For example, real properties forming part of the inventory of a real estate
dealer, which are foreclosed, shall, for purposes of determining the applicable tax on
such foreclosure sale, be treated as ordinary assets. On the other hand, the nature of
such real property in the hands of the foreclosure buyer shall be determined in
accordance with the rules stated in sub-paragraph (f) hereof.
SECTION 4.
Applicable Taxes on Sale, Exchange or Other Disposition of
Real Property. Gains/Income derived from sale, exchange, or other disposition of
real properties shall, unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital
assets or ordinary assets.
a. In the case of individual citizens (including estates and trusts), resident
aliens, and non-resident aliens engaged in trade or business in the Philippines.
(i)

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Capital gains presumed to have been realized from the sale,

exchange, or other disposition of real property located in the
Philippines, classified as capital assets, shall be subject to the six
percent (6%) capital gains tax imposed under Sec. 24(D)(1) or
25(A)(3) of the Code, as the case may be, based on the gross
selling price or current fair market value as determined in
accordance with Sec. 6(E) of the Code, whichever is higher,
provided, that if the buyer is the Government or any of its political
subdivisions or agencies or a government-owned-or-controlled
corporation, the tax liability shall, at the option of the individual
seller (including estate or trust), be computed on the basis of either
the six percent (6%) capital gains tax under Sec. 24(D)(1)/25(A)(3)
or the graduated tax rates under Sec. 24(A)(1)(c) or 25(A)(1), all of
the Code.
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(ii)

The sale of real property located in the Philippines, classified as

ordinary assets, shall be subject to the creditable withholding tax
(expanded) under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as
amended, based on the gross selling price or current fair market
value as determined in accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the ordinary income tax
imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the
case may be, based on net taxable income.

b. In the case of non-resident aliens not engaged in trade or business in the

Philippines. Capital gains presumed to have been realized by non-resident aliens
not engaged in trade or business in the Philippines on the sale of real property located
in the Philippines shall be subject to the six percent (6%) capital gains tax imposed
under Sec. 25(B), in relation to Sec. 24(D)(1), of the Code, based on the gross selling
price or current fair market value as determined in accordance with Sec. 6(E) of the
Code, whichever is higher.
c.

In the case of domestic corporations.

(i)

Capital gains presumed to have been realized from the sale,

exchange or disposition of lands and/or buildings located in the
Philippines, which are classified as capital assets, shall be subject
to a capital gains tax of six percent (6%) based on the gross selling
price or current fair market value as determined in accordance with
Sec. 6(E) of the Code, whichever is higher, of such land and/or
buildings pursuant to Sec. 27(D)(5) of the Code.

(ii)

The sale of land and/or building classified as ordinary asset and

other real property (other than land and/or building treated as
capital asset), regardless of the classification thereof, all of which
are located in the Philippines, shall be subject to the creditable
withholding tax (expanded) under Sec. 2.57.2(J) of Rev. Regs. No.
2-98, as amended, and consequently, to the ordinary income tax
under Sec. 27(A) of the Code. In lieu of the ordinary income tax,
however, domestic corporations may become subject to the
minimum corporate income tax (MCIT) under Sec. 27(E) of the
Code, whichever is applicable.
TaCDcE

d. In the case of resident foreign corporations. Real property located in

the Philippines, regardless of classification, sold by a resident foreign corporation
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shall be subject to the creditable withholding tax (expanded) under Sec. 2.57.2(J) of
Rev. Regs. No. 2-98, as amended, and consequently, to the ordinary income tax under
Sec. 28(A)(1) or to the MCIT under Sec. 28(A)(2), both of the Code, whichever is
applicable.
e. In the case of non-resident foreign corporations. The gain from the
sale of real property located in the Philippines by a non-resident foreign corporation
shall be subject to the final withholding tax at the rate of thirty-two percent (32%)
imposed under Sec. 2.57.1(I) of Rev. Regs. No. 2-98, as amended, in relation to Sec.
28(B)(1) of the Code.
f. Income on sale of real property not located in the Philippines. Gain
realized from the sale, exchange, or other disposition of real property not located in
the Philippines, regardless of classification, by resident citizens or domestic
corporations shall be subject to the income tax imposed in Sec. 24(A)(1), or Sec.
27(A) or (E) of the Code, as the case may be. Such income/gain shall be exempt
pursuant to Sec. 23(B), (D) and (F) of the Code, as the case may be, in the case of
non-resident citizens, alien individuals and foreign corporations,
SECTION 5.
Repealing Clause. All existing BIR rulings, revenue
rules, regulations and other issuances or portions thereof inconsistent with the
provisions of these regulations are hereby modified, repealed or revoked accordingly.
SECTION 6.
Effectivity. These Regulations shall take effect after
fifteen (15) days following publication in the Official Gazette or in any newspaper of
general circulation.
(SGD.) JOSE ISIDRO N. CAMACHO
Secretary of Finance

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