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 the Bureau of
Internal Revenue, etc.)
b) In the case of 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 trade or business of the taxpayer shall be considered as ordinary
assets.
c) In the case of taxpayers who changed its real estate
business to a non-real estate business, real properties held by these
taxpayer shall remain to be treated as ordinary assets.
d) In the case of taxpayers who originally registered
to be engaged in the real estate business but failed to subsequently
operate, all real properties acquired by them shall continue to be
treated as ordinary assets.
e) Real properties formerly forming part of the stock
in trade of a taxpayer engaged in the real estate business, or formerly
being used in the trade or business of a taxpayer engaged or not engaged
in the real estate business, which were later on abandoned and became
idle, shall continue to be treated as ordinary assets. Provided however,
that properties classified as ordinary assets for being used in
business by a taxpayer engaged in business other than real estate
business are automatically converted into capital assets upon showing
proof that the same have not been used in business for more than two
years prior to the consummation of the taxable transactions involving
said properties
f) Real properties classified as capital or ordinary
asset in the hands of the seller/transferor may change their character
in the hands of the buyer/transferee. The classification of such
property in the hands of the buyer/transferee shall be determined in
accordance with the following rules:
i) Real property transferred through succession or
donation to the heir or donee who is not engaged in the real estate
business with respect to the real property inherited or donated, and who
does not subsequently use such property in trade or business, shall be
considered as a capital asset in the hands of the heir or donee.
ii) Real property received as dividend by the
stockholders who are not engaged in the real estate business and who do
not subsequently use such property in trade or business, shall be
considered as a capital asset in the hands of the recipients even if the
corporation which declared the real property dividends is engaged in
real estate business.
iii) The real property received in an exchange shall be
treated as ordinary asset in the hands of the case of a tax-free
exchange by taxpayer not engaged in real estate business to a taxpayer
who is engaged in real estate business, or to a taxpayer who, even if
not engaged in real estate business, will use in business the property
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.
(Excerpts from Source : http://www.bir.gov.ph/taxinfo/tax_capgin.htm)
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