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On October 3, 2023, the BIR Commissioner released (RMC) 99-2023, which discusses how to tax RE properties classified as "Ordinary Assets." This is a MUST READ.
These are my interpretations of the RMC. Please note that I am neither a lawyer nor an accountant. So, it's still best to speak with a lawyer/accountant regarding these matters.
Why the RMC was released
Based on the Q&A-style RMC, there seems to be confusion among RDOs on how to classify RE assets. So, the Commissioner elaborates on the definition provided in RR 7-2003.
Here are examples of the confusion (I think) they're referring to:
Confusion 1: If a proprietor owns a RE property (his house) that he uses as a bake shop, is that RE property considered an "ordinary asset"?
RMC: If we follow RR 7-2003, then the answer is yes. The property falls under "Real property used in trade or business of a character which is subject to the allowance for depreciation..."
Confusion 2: When the proprietor sells the property, does that mean the baker will issue the bakery's official receipt (OR) when he gets the sale proceeds? Is that even allowed when that OR is mainly for his bakery business?
RMC: Even if the OR is meant for another business (i.e., sale of bread), he could still use his OR for the sale of the RE property.
Confusion 3: So if he uses his OR, does that mean he will book the money he sold it for as revenue?
RMC: If the seller's registration is not RE business, then the sale will NOT be a part of his gross sales. BUT the gain he made from the sale must be declared in his income tax return.
[JPRE: The gain is calculated based on the difference of the selling price from the property's book value (acquisition cost). But what if the seller doesn't know the book value? Like, what if he inherited the property? The RMC doesn't elaborate on this...]
Confusion 4: Are the sale of all RE assets used for business subjected to VAT?
RMC: The sale will NOT be subjected to VAT if:
a. The seller is a NON-VAT registered entity.
b. If the sale is utilized for "socialized housing" and is less than P3,199,200.01.
Confusion 5: But what if the property was sold for P4 Mn, but the zonal value is P5 Mn? What's the basis for VAT–4 or 5 Mn?
RMC: The VAT shall be based on the higher of the two. So, 5 Mn.
Confusion 6A: What if the baker avoided paying VAT by donating the property to his daughter (pay donor's tax), then have his daughter (who is not in any business) sell the property?
RMC: That donation of an ordinary asset is considered a sale based on RR 16-2005. So, if the baker is VAT-registered, he would have to pay VAT on the donation. If the baker is NON-VAT registered, then the donation is VAT-exempt.
Confusion 6B: So, assuming the baker paid VAT on the donation and transferred the property to his daughter, will that property still be considered an ordinary asset?
RMC: If the baker continues using the property for his bake shop despite his daughter owning it, it remains an "ordinary asset."
Confusion 7: Let's discuss another example. Suppose a VAT-registered proprietor acquired an empty lot for a new supermarket branch. Years passed, and that plan never materialized. The lot remains to be empty. So, if he decides to donate that lot to his son, will that donation be subjected to VAT?
RMC: Yes, because it was originally intended for use in business.
JPRE: My take-away here is this: keep residential properties, residential. Don't use them for business. Also, avoid being VAT-registered (even your donations may be subjected to VAT).
You can download the actual RMC below.
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