MODULE 13 DEALINGS IN REAL PROPERTY.pptx

taxation

1. DEALINGS IN REAL PROPERTY TYPES: Ordinary assets : Stock in trade or property held primarily for sale to customers (Inventory)in the ordinary course of business. Property used in trade or business, including: Depreciable assets (e.g., machinery, equipment).Real property used in business (e.g., office buildings, warehouses). Capital assets : Real properties held by taxpayers not included as ordinary assets

2. RMC No. 99-2023 Real properties considered "ordinary assets" , as provided in Revenue Regulations No. 7-2003, shall refer to all "real properties" specifically excluded from the definition of capital assets under Section 39(A)(1) of the NIRC , as amended. These include: 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 Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or 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 Real properties used in trade or business of the taxpayer; or In the case of banks, real properties acquired through foreclosure sale .

3. SALE of REAL Property considered as an ORDINARY ASSET Subject to Business tax: 12% VAT on Sale of Real Property ( Ordinary Asset ) 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.  RA 12001 RPVARA , This Act aims to establish and maintain standards based on the Philippine Valuation Standards (PVS) to govern the valuation of real property in the country through the Bureau of Local Government Finance. 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 Philippine Valuation Standard (PVS) to ensure uniform valuation of real properties The Commissioner of Internal Revenue shall use the Schedule of Market Value ( SMV ) or the actual gross selling price, as stated in the real property transaction documents, whichever is higher, in computing any internal revenue tax.

4. RMC 99-2023 Donation of Real Property 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

5. INSTALLMENT SALE/DEFERRED PAYMENT For VAT purposes, the sale of real property is classified into an installment sale or a deferred sale plan, which remain unchanged by the EOPT Act. It is considered a sale on an i nstallment 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. 

6. In an 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.  On a deferred-payment basis , the sale is considered as a 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. 

7. INSTALLMENT PAYMENT OF CAPITAL GAIN TAX IN TAX RETURN 1706 For Individual Taxpayer Only INSTALLMENT PAYMENT OF FINAL CAPITAL GAIN TAX (Section 40 B) The sale is more than P1,000 Initial payment is not more than 25% of the selling price For sale of real property, initial payment includes the excess of mortgage assumed over the cost of sale. Installment tax payable = (collection/contract price) X total tax due Contract price is Selling price – lower of cost or mortgage assumed Contract price, (17M – 5M ) = P 12M Capital gain tax , P20,000,000 x 6%) = P 1,200,000 Year 2, ( 5M/12M) = P500,000 Year 3, ( 3M/12M) = P300,000 Year 1, ( 4M/12M) = P400,000 X Idle land (capital asset) was sold for P17,000,000 when zonal value was P20,000,000. Cost to the seller P5,000,000, P6,000,000 unpaid mortgage assumed by the buyer. Terms: Year of sale cash payment = P3,000,000 Year 2 cash payment = P 5,000,000 Year 3 cash payment = P 3,000,000 Percentage of Initial payment, (3M+1M)/17M = 24% Installment Payment

8. Final Tax Return 1706 Capital Gains Tax Return for Onerous Transfer of Real Property Classified as Capital Asset (both Taxable and Exempt) Filed within thirty (30) days following each sale, exchange or disposition of real property - In case of installment sale , the return shall be filed within thirty (30) days following the receipt of the 1st down payment and within thirty (30) days following each subsequent installment payment - One return is filed for every transfer document, regardless of the number of properties sold, exchanged or disposed of

9. 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 a 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 buyer shall be claimed as a tax credit. A copy of BIR Form No. 1606 with proof of payment of the Creditable Withholding Tax shall be attached to the ITR where the seller declared the sales. 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.

10. VAT INVOICE Seller of real properties classified as “ordinary assets” are required to issue a Sales Invoice. The same shall apply to a VAT-registered taxpayer who is engaged solely in the sale of services but sells its real property used in trade or business pursuant to EOPT Act.

11. What is meant by capital asset ? Capital asset s 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. [Sec. 2(a) of RR No. 7-2003]

12. CAPITAL GAIN TAXES: * CAPITAL GAINS TAX FOR ONEROUS TRANSFER OF SHARES OF STOCKS NOT TRADED THROUGH THE LOCAL STOCK EXCHANGE Tax Form BIR Form 1707 - Capital Gains Tax Return (For Onerous Transfer of Shares of Stocks Not Traded Through the Local Stock Exchange) * CAPITAL GAINS TAX FOR ONEROUS TRANSFER OF REAL PROPERTY CLASSIFIED AS CAPITAL ASSETS (TAXABLE AND EXEMPT) Tax Form BIR Form 1706 – Final Capital Gains Tax Return (For Onerous Transfer of Real Property Classified as Capital Assets -Taxable and Exempt)

13. EXEMPTIONS Certain capital asset transactions in Philippine taxation are exempt from capital gains tax (CGT) . Key Exempt Real Property Transactions Sale of Principal Residence Must be owned and used as a principal residence for at least 3 years Proceeds must be used to purchase/construct a new principal residence within 18 months Inherited Properties : Properties transferred through inheritance are not subject to CGT but are subject to estate tax. The subsequent sale of an inherited property by the heirs, however, is subject to CGT. Donations: Properties transferred as donations are subject to the donor's tax instead of CGT. Government Expropriation : Properties acquired by the government through expropriation are exempt from CGT.`