RR No. 07-2003: Provides guidelines in determining whether a particular real property is a capital asset or an ordinary asset for purposes of imposing Capital Gains Tax, or the ordinary Income Tax, or the Minimum Corporate Income Tax (MCIT)

Key points

1. Real estate business. Ordinary assets include all real properties acquired by a real estate dealer, those acquired by a real estate developer, and those held for sale or lease in the ordinary course of business or used in the trade or business. They also include properties acquired by a real estate lessor that are for or in lease or use in business, and those acquired in the course of business by a taxpayer habitually engaged in selling real estate.
2. Other taxpayers. For taxpayers not in real estate, real property used, being used or previously used in the trade or business is an ordinary asset. Real property used by an exempt corporation in its exempt operations is not treated as used for business and is a capital asset.
3. No reclassification. A change from real estate to non-real estate business does not reclassify property to capital asset. Property originally acquired by a real estate business stays an ordinary asset even if later abandoned or idle, or after later non-operation.
4. Conversion to capital asset. Ordinary assets used in business by a taxpayer not in real estate are automatically converted to capital assets on proof of non-use in business for more than two (2) years before the taxable transaction.
5. Buyers and involuntary sales. Classification in the seller’s hands may change in the buyer’s hands. In involuntary transfers such as expropriation or foreclosure, the involuntariness has no effect on the classification in the involuntary seller’s hands.
6. Taxes on gains. Unless otherwise exempt, gains from sale, exchange or other disposition are subject to the applicable taxes in the Regulations, depending on whether the property is a capital or ordinary asset.

Who is affected

• Real estate dealers, developers and lessors
• Taxpayers habitually engaged in sale of real estate
• Taxpayers not engaged in real estate business
• Exempt corporations

Deadlines and effectivity

• Conversion to capital asset: not used in business for more than two (2) years before the transaction