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Ive been a Real Estate Broker for quite sometime now and the issue of
ordinary asset and capital asset is still something that puzzles me, more
so, the property owners as there are unique cases every now and then.
Now this is important to understand as the consequence may lead to
paying deficiency in tax , penalty and delay in processing the transfer of
Title which is really something that can be avoided.
In sales of real property, the character or nature of the property will
determine the taxes that will be due. Real property can either be a capital
asset or an ordinary asset. Capital assets have been defined as all pieces
of real property held by a taxpayer, whether or not connected with his
trade or business, and which are not included among the pieces of real
property considered as ordinary assets. On the other hand, ordinary
assets are defined by enumeration, and refer to all pieces of real property
excluded from the definition of capital assets, namely: 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 that
is subject to the allowance for depreciation; or real property used in trade
or business of the taxpayer.
The first two sets of ordinary assets are those usually held by people or
companies engaged in the buy and sell of pieces of real property, or realestate dealers and developers. The last two sets of ordinary assets can be
held by people or companies that are not necessarily in the real-estate
business, but are used in other types of businesses. Examples are resort
facilities owned by a resort owner, a factory used for the manufacture of
products, office units or buildings used as corporate headquarters, hotels,
shopping malls, among others. The Bureau of Internal Revenue (BIR) has
clarified in its regulations and rulings that real property does not lose its
character as an ordinary asset even if it becomes fully depreciated, or if
circumstances prevent it from being used in business, or if there is
discontinuance in its use in business.
When what is sold is real property classified as a capital asset, capitalgains tax (CGT) at the rate of 6 percent of the gross selling price or the
fair market value of the property, whichever is higher, will be due for
payment. CGT is a final income tax. It is paid under a premise that the
seller derived a presumed capital gain. Hence, even in the event that a
seller of real property classified as a capital asset did not really derive any
gain from the transaction (and even suffered a loss), the CGT is
nonetheless due and payable. CGT must be paid within 30 days from the
date of the sale.
An interesting point to note is that a sale of a real property classified as a
capital asset may be exempt from CGT. If an individual sells his principal
residence and the proceeds thereof are fully utilized in acquiring or
It should be stressed that the CWT which was paid on the sale of real
property classified as an ordinary asset is merely an advance or a prepaid
income tax, which will be deducted from the income tax payable of the
seller. If the sellers gain is substantial thereby resulting in an income tax
payable that is higher than the CWT that was previously paid to the BIR,
then the seller will have no choice but pay an additional income tax for
the quarter or for the previous year. If the seller derives a loss and/or the
CWT that has been remitted to the BIR on his/its behalf is more than the
income tax due, the seller may opt to use the excess prepaid tax for
subsequent taxable quarters or years, or apply for a tax credit from the
BIR.
Capital vs. Ordinary Assets
CAPITAL
VS.
ORDINARY
ASSET
How can you determine whether a particular real property is a capital
asset
or
an
ordinary
asset?
a) Real properties shall be classified with respect to taxpayers engaged in
the real estate business as follows:
i) All real properties acquired by the real estate dealer shall be
considered
as
ordinary
assets.
ii) 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 held 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.
iii) All real properties of the real estate lessor, whether land, building
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.
iv) All real properties acquired in the course of trade or business by a
taxpayer habitually engaged in the sale of real property shall be
considered
as
ordinary
assets.
Note: 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
received in exchange.
g) In the case of involuntary transfers of real properties, including
expropriations 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.
The FWT and the CWT are the two basic kinds of withholding taxes. The
FWT is a tax wherein the payer withholds an amount from the payees
income, and pays this amount to the government instead on behalf of the
payee. The payee then no longer needs to file an income tax return for
this income. The CWT is similar in the sense that the payer also withholds
an amount of the payees income and pays this to the government.
However, this amount withheld is usually just an estimate the payee is
still required to file an income tax return to report the income and to pay
the difference between the tax withheld and the real amount due on the
income.
The FWT is usually applicable to indirect sources of income, such as
income from dividends, interest, royalties, capital gains from sale of
property, etc, and income of foreign companies and their employees. The
CWT, on the other hand, is usually applicable to income of Filipinos from
employment and/or fees received.
What kinds of income are subject to the CWT?
Basically, incomes that are subject to the CWT are incomes from
employment (compensation income), and fees such as professional fees,
talent fees, rental income, service income, etc.
At what rates is the CWT imposed?
Like the final withholding tax, the CWT is imposed at different rated,
depending on the type of income being taxed.
5%
P10,000 to P30,000
P30,000 to P70,000
P70,000 to P140,000
P140,000 to P250,000
P250,000 to P500,000
P125,000
P500,000
35%* of
the
excess
over
1.
15.
Compensation for injuries, sickness, or damages awarded by suit or
agreement
16.
Income exempt under treaty
17.
13th month pay and other benefits not exceeding P30,000
18.
GSIS, SSS, union dues, and other contributions by individual
employees
from
the
compensation
income
Q
One of the notable exemptions is found in Republic Act (RA) No. 4917 (An
Act Providing that Retirement Benefits of Employees of Private Firms shall
not be subject to Attachment, Levy, Execution, or any Tax whatsoever),
now embodied in Section 32(B)(6)(a) of the Tax Code which states, among
others, that retirement benefits received by officials and employees of
private firms in accordance with a reasonable private benefit plan
maintained by the employer shall be exempt from income tax, provided:
(1) The retiring official or employee has been in the service of the same
employer for at least 10 years; (2) The retiring official or employee is not
less than 50 years of age at the time of his retirement. (3) The retiring
official or employee should not have previously availed of the privilege
under the retirement benefit plan of the same or another employer.