VAT ON SALE OF REAL PROPERTY BY A PERSON NOT

ENGAGED IN REAL ESTATE BUSINESS

Legal Research
1. Applicable Tax on sale of real property
For Capital Assets is:
a.) 6% Capital Gains tax
For Ordinary Assets is:
a.) Crediatable Withholding Tax
b.) Ordinary Income tax
REVENUE REGULATIONS NO. 7-2003
SEC. 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.
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) 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-orcontrolled 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.
(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.

2. Definition of the Ordinary or capital asset

REVENUE REGULATIONS NO. 7-2003
SECTION 2
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;
2. Real property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business;
3. 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 for under Sec. 34(F) of the Code;
3. Ordiinary/Capital assets of a person not engaged in engaged in the real
estate business
REVENUE REGULATIONS NO. 7-2003
SEC 3(b). Taxpayer not engaged in the real estate business. - In the case of a
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.
3. Real property of a tax payer not engage in real estate business can be
considered an ordinary asset? [REVENUE REGULATIONS NO. 4-2007]
a.) Sale of RESIDENTIAL PROPERTY may be subject to VAT depending
on Gross Selling Price
Sale of residential lot with gross selling price exceeding P 1,500,000.00
(amended to 1,919,500 effective January 1, 2012, as per RR No. 16-2011),
residential house and lot or other residential dwellings with gross selling price
exceeding P 2,500,000.00(amended to P3,199,200.00 (effective January 1,
2012, as per RR No. 16-2011), where the instrument of sale (whether the
instrument is nominated as a deed of absolute sale, deed of conditional sale

or otherwise) is executed on or after November 1, 2005, shall be subject to

10% output VAT and starting February 1, 2006, to 12% output VAT.
b.) Even if not held primarily for sale to customers but used
incidental to business or trade still subject to VAT
b. Sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business. However, even if the real
property is not primarily held for sale to customers or held for lease in the
ordinary course of trade or business but the same is used in the trade or
business of the seller, the sale thereof shall be subject to VAT being a
transaction incidental to the taxpayers main business
4. The tax base of 12% Vat applied to?
12% of Gross Selling Price (GSP for brevity)
GSP means the consideration or selling price stated in the sales document, or
fair market value (FMV), whichever is higher. FMV is the FMV or zonal value as
determined by the BIR, or the FMV in the real property tax (RPT) declaration,
whichever is higher. If there is no zonal value, GSP refers to the FMV in the
latest RPT declaration, or the consideration, whichever is higher. If the VAT is
not stated separately in the document of sale, the selling price or
consideration stated therein shall be deemed to be inclusive of VAT.
Meanwhile, the FMV is deemed exclusive of VAT.
SOURCES
How Vat affects real property sales
link http://www.sgv.ph/how-vat-affects-real-property-sales-by-maricris-u-seejanuary-14-2013/
What you need to know about Value-Added Tax (VAT) on the sale of Real
Estate
link http://www.foreclosurephilippines.com/value-added-tax-vat-on-the-saleof-real-estate#[3]
RR 04-2007
link ftp://ftp.bir.gov.ph/webadmin1/pdf/33868rr%204-2007.pdf
RR 7-2003
link ftp://ftp.bir.gov.ph/webadmin1/pdf/1344rr07_03.pdf