Selling Property? The BIR Has Drawn a Clearer Line in the Sand.
Under Revenue Memorandum Circular (RMC) No. 31-2025, the Bureau of Internal Revenue (BIR) is tightening its stance on how real properties sold by those habitually engaged in the real estate business are classified and taxed. The distinction between capital and ordinary assets is no longer based solely on intention — it must now be backed by proper documentation and tax compliance.
Why It Matters:
Prior to this circular, varying interpretations often led sellers to declare properties as capital assets (subject to the 6% Capital Gains Tax or CGT), even when the law actually considered them ordinary assets. The result? Misaligned filings, disallowed tax credits, audit risks, and delays in securing Certificates Authorizing Registration (CAR). The government, meanwhile, saw reduced tax revenue.
What the Law Says:
Under Section 39(A)(1) of the NIRC, capital assets are generally defined as properties not used in the ordinary course of business. However, for those engaged in real estate — whether as a dealer, developer, or lessor — real properties held for sale or used in business are classified as ordinary assets under Revenue Regulations No. 7-2003. Even idle properties can retain their ordinary status unless reclassified under the 2-year rule (applicable to non-real estate businesses).
The Tax Consequence?
Ordinary assets are taxed differently:
• Creditable Withholding Tax (CWT)
• Value-Added Tax (VAT)
• Income Tax on Net Income
Rather than the flat 6% CGT.
Key Highlights of RMC 31-2025:
1. Transaction-Specific Filing
• File BIR Form 1606 for each sale—batch filing is not allowed.
• File Form 2000-OT for the Documentary Stamp Tax (DST) on every deed.
2. Stricter Documentation Requirements
• Only BIR Form 1606 with official proof of payment is valid for tax credit claims.
• Form 2307 alone is no longer sufficient.
3. VAT on Loan Proceeds
• When a financing entity releases proceeds to the seller, a 12% VAT is triggered.
• A Sales Invoice and Acknowledgment Receipt must be issued accordingly.
4. Miscellaneous Charges Are Also Taxable
• Charges for transfer, registration, or processing are now subject to both VAT and income tax.
Who Benefits?
• Taxpayers: Gain clarity and reduce exposure to audit risks.
• Buyers: Avoid delays in processing property title transfers.
Action Points for Real Estate Sellers:
i. Verify property classification (Capital vs. Ordinary)
ii. File Form 1606 per transaction with supporting proof of payment
iii. Declare VAT correctly on loan-financed transactions
iv. Record all miscellaneous charges in your books and filings
v. Match tax credits in your ITR with official BIR forms
Reminder: Misclassification, under-declared VAT, and invalid tax credits can lead to penalties and raise audit red flags.
Final Thought:
RMC 31-2025 doesn’t introduce new rules—it sharpens enforcement of existing ones. For developers, lessors, and real estate businesses, the message is clear: Know your asset. File it right.
DISCLAIMER: This article is developed by subject matter experts at Babylon2k. This is for general information only and does not constitute expert advice. It is based on current regulations and may not account for all related topics. Any tax or compliance guidance provided cannot be used to avoid penalties or promote specific actions. Laws and interpretations may change over time, which could affect the accuracy of this report. We are not obligated to update this advisory if new regulations arise.
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RESOURCES
RMC No. 31-2025 Ordinary Asset CWT | Download here.
