TAX TRAP: 6-TRANSACTION RULE

Did you know: the BIR can classify you as engaged in real estate business based on transaction volume?

Many real estate investors are unaware that the Bureau of Internal Revenue (BIR) can classify them as being "engaged in real estate business" simply by exceeding five real estate transactions in a single calendar year.

Why Does This Matter?

The last thing you’d want is to be officially registered as a real estate business, because the moment you are, all your properties—including your primary residence—become subject to VAT. This has major tax implications, which I’ll discuss further in a future post.

How Does the BIR Determine This?

The BIR considers any individual with at least six real estate transactions in the previous year as "habitually engaged" in real estate. Once tagged, they are treated as a real estate developer, regardless of whether they intended to be.

What Counts as a ‘Transaction’?

The law refers to real estate transactions, which LIKELY includes both buying and selling.

For example:

If you purchased a condo unit with two parking slots in 2022 (each with separate titles) and later sold them within the same year, this would already count as three transactions.

If you had additional real estate purchases or sales that same year, reaching six transactions in total, the BIR could automatically classify you as a real estate developer.

How Can You Avoid This?

If you're buying multiple properties within a year, it may be strategic to time the notarization of sale documents to avoid exceeding the transaction limit. Proper planning can help prevent unintended tax consequences.

Have you encountered this rule in practice? Let me know your thoughts!