Introduction

The sale of apartment buildings and other real properties in the Philippines triggers various tax implications under the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent laws such as the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963), the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law (Republic Act No. 11534), and relevant Bureau of Internal Revenue (BIR) rulings and regulations. Income tax treatment primarily revolves around whether the property is classified as a capital asset or an ordinary asset, the nature of the seller (individual, corporation, or estate/trust), and specific exemptions or incentives. This article provides an exhaustive examination of the rules, computations, exemptions, withholding requirements, and related considerations for such transactions, ensuring compliance with Philippine tax laws.

Classification of Real Properties: Capital vs. Ordinary Assets

The cornerstone of income tax treatment lies in the asset classification under Section 39(A) of the NIRC. Real properties, including apartment buildings, are categorized as follows:

Capital Assets: Properties held by the taxpayer but not used in trade or business, such as personal residences or investment properties not regularly sold. Sales of capital assets are subject to Capital Gains Tax (CGT) at a flat rate of 6% on the gross selling price (GSP) or current fair market value (FMV), whichever is higher (Section 27(D)(5) for domestic corporations and Section 24(D) for individuals).
Ordinary Assets: Properties used in trade or business, including those held primarily for sale to customers (e.g., inventory of real estate dealers), depreciable properties used in business (like rental apartment buildings for habitual lessors), or properties acquired for business purposes. Gains from sales of ordinary assets are treated as ordinary income, subject to regular income tax rates (progressive for individuals or flat corporate rates) and potentially Value-Added Tax (VAT) under Section 106.

For apartment buildings specifically:

If the building is rented out as part of a business (e.g., by a real estate lessor with multiple properties), it may be depreciable and thus ordinary.
Isolated sales by non-dealers typically qualify as capital transactions.
BIR Ruling No. DA-593-04 clarifies that properties acquired through inheritance or donation may start as capital but can shift to ordinary if used in business.

Factors determining classification include the frequency of sales, the seller's primary business, and intent (as per Revenue Regulations (RR) No. 7-2003). For instance, a corporation engaged in real estate development selling an apartment building from its inventory faces ordinary income tax, while an individual selling a personally owned apartment used sporadically for rental might incur CGT.

Tax Rates and Computations

1. Capital Gains Tax (CGT) for Capital Assets

Rate: 6% final tax on GSP or zonal value/FMV (as determined by the BIR or local assessor), whichever is higher.
Basis: No deduction for cost basis or improvements; it's a presumptive tax.
Computation Example: Suppose an apartment building is sold for PHP 50 million, with FMV at PHP 60 million. CGT = 6% × PHP 60 million = PHP 3.6 million.
Installment Sales: If payment is in installments (initial payment ≤ 25% of GSP), CGT is prorated based on collections (Section 49, NIRC; RR No. 16-2005). For apartment buildings, this is common in developer-financed deals.
Exchanges: Taxable if not like-kind; however, tax-free exchanges under Section 40(C)(2) apply for reorganizations, but rarely for real properties unless part of corporate mergers.

2. Ordinary Income Tax for Ordinary Assets

Individuals: Progressive rates from 0% to 35% on taxable income (post-TRAIN adjustments), applied to net gain (GSP minus cost, improvements, and selling expenses).
Corporations: 25% regular corporate income tax (RCIT) under CREATE (reduced from 30%), or 2% minimum corporate income tax (MCIT) if applicable, on net gain.
Computation Example: An apartment building bought for PHP 30 million (with PHP 5 million improvements) sold for PHP 50 million incurs a net gain of PHP 15 million, taxed at the applicable rate.
Depreciation Recapture: For depreciable properties like apartment buildings, any gain attributable to prior depreciation is taxed as ordinary income (Section 39(B)).
Passive Income: If the sale qualifies as passive, it may be subject to final withholding taxes, but real property sales generally do not.

3. Value-Added Tax (VAT) Implications

While not strictly income tax, VAT interacts closely:

Sales of ordinary real properties (e.g., by dealers) are subject to 12% VAT on GSP (Section 106).
Threshold: Exempt if annual gross sales ≤ PHP 3 million for non-VAT registered sellers (RR No. 16-2011).
Apartment buildings sold as part of business inventory incur VAT; input VAT on construction may be credited.
Lease preceding sale: If an apartment is leased, rental income is VAT-able if exceeding thresholds, but the sale itself follows asset classification.

4. Special Rules for Foreclosures and Dacion en Pago

In mortgage foreclosures, the highest bidder (often the mortgagee) pays CGT if the property is capital, or ordinary tax if ordinary.
Dacion en pago (payment in kind) is treated as a sale, triggering the same taxes (BIR Ruling No. 046-2000).

Exemptions and Relief Measures

Several exemptions mitigate tax burdens:

Principal Residence Exemption: Under Section 24(D)(2), sale of an individual's principal residence is CGT-exempt if proceeds are used to acquire/build a new residence within 18 months, with escrow requirements (RR No. 13-99). Applies to single-family apartments but not multi-unit buildings unless qualified.
Senior Citizens and PWDs: Exempt from CGT on sales of properties up to certain limits under Republic Act No. 7432 and 7277, as amended.
Tax-Free Exchanges: Section 40(C)(2) allows deferral for property exchanges in mergers or consolidations.
Installment Relief: Deferred recognition for long-term contracts.
Abandonment Losses: Deductible if the property is ordinary and abandoned (Section 34(D)).
Zonal Value Adjustments: BIR may adjust FMV, but sellers can contest via appraisal.
CREATE Law Incentives: For registered enterprises under the Board of Investments (BOI) or Philippine Economic Zone Authority (PEZA), sales of properties in ecozones may enjoy income tax holidays or reduced rates.

For estates and trusts: Sales by estates are treated similarly, with CGT or ordinary tax depending on classification; beneficiaries may inherit stepped-up basis.

Withholding Taxes and Compliance Requirements

Creditable Withholding Tax (CWT): Mandatory on sales of real properties (RR No. 2-98, as amended by RR No. 14-2021):
- 1.5% to 6% for capital assets, based on seller type and value.
- For ordinary assets, up to 5% if seller is habitually engaged in real estate.
- Buyer withholds and remits via BIR Form 1606.
Expanded Withholding Tax (EWT): Applies if sale is to government entities.
Filing and Payment: CGT due within 30 days of sale (BIR Form 1706); ordinary income included in annual returns (Form 1700/1701 for individuals, 1702 for corporations).
Documentary Requirements: Certificate Authorizing Registration (CAR) from BIR is required for title transfer; includes proof of tax payment.
Penalties: Surcharges (25-50%), interest (12% per annum post-TRAIN), and compromises for non-compliance (Section 248-255, NIRC).

Special Considerations for Apartment Buildings

Multi-Unit Sales: If sold as a whole, treated as one transaction; if units sold separately, each may be assessed individually, potentially shifting classification if frequent.
Condominium vs. Apartment: Similar treatment, but condominium sales under Republic Act No. 4726 (Condominium Act) may involve master deed considerations for tax basis.
Renovations and Improvements: Added to basis for net gain computation in ordinary sales; for CGT, irrelevant as it's gross-based.
Foreign Sellers: Non-resident aliens pay 6% CGT if engaged in business, or 25% on gain if not; corporations at 25% RCIT.
Inflation Adjustments: No indexation for inflation in CGT, unlike some jurisdictions.
Related Party Transactions: Arm's length principle applies; BIR may revalue if undervalued (Section 50).
Environmental and Zoning Issues: While not tax-direct, non-compliance may lead to disallowance of deductions.

Judicial and Administrative Interpretations

Court decisions shape application:

Commissioner vs. Court of Appeals (G.R. No. 108358): Clarified that isolated sales are capital.
Calasanz vs. Commissioner (G.R. No. L-50963): Properties developed for sale are ordinary.
BIR Rulings: E.g., No. 120-2012 on VAT for installment sales; No. 015-2015 on exemptions for principal residences.

Planning Strategies and Risks

Taxpayers can optimize via:

Structuring as capital sales by avoiding business indicators.
Utilizing exemptions through proper documentation.
Deferring via installments.

Risks include audits, reclassification, and double taxation if misreported. Professional advice from CPAs or lawyers is recommended.

Conclusion

The income tax treatment of sales of apartment buildings and properties in the Philippines is multifaceted, balancing revenue generation with taxpayer relief. Compliance ensures avoidance of penalties, while strategic planning can minimize liabilities. As tax laws evolve, staying abreast of amendments is crucial for all stakeholders.