In the Philippine real estate market, the tax treatment of foreclosed properties—technically referred to as Real and Other Properties Acquired (ROPA)—hinges entirely on the classification of the property. For financing companies, this distinction is the difference between a relatively low fixed tax rate and a significantly higher burden based on corporate income scales.
The governing rules are primarily found in the National Internal Revenue Code (NIRC), as amended by the TRAIN Law and CREATE Act, and further clarified by Revenue Regulations (RR) No. 7-2003.
1. The Core Distinction: Capital vs. Ordinary
The classification of a property is determined by its use and the nature of the taxpayer's business, rather than the physical characteristics of the land or building.
Capital Assets
These are assets held by a taxpayer that are not used in trade or business. For individuals, this usually includes residential homes. However, for a financing company, it is rare for foreclosed property to be treated as a capital asset unless the company can prove the property was never intended for sale or lease and was held purely for investment outside its primary business scope.
- Tax Implication: Subject to 6% Capital Gains Tax (CGT) based on the Gross Selling Price or Zonal Value (whichever is higher).
Ordinary Assets
Under RR No. 7-2003, properties acquired by banks and financing companies through foreclosure are almost always classified as Ordinary Assets. This is because these institutions are considered "habitually engaged" in the business of lending, where foreclosure is a standard legal remedy for breach of contract.
Ordinary assets include:
- Stock in trade or inventory.
- Property used in trade or business subject to depreciation.
- Real property held primarily for sale to customers.
- Foreclosed properties (ROPA) held by financing companies.
2. Tax Obligations for Financing Companies
When a financing company sells a foreclosed property classified as an Ordinary Asset, the tax structure is more complex than a simple flat rate.
A. Income Tax (Creditable Withholding Tax)
The sale is not subject to CGT. Instead, it is subject to Creditable Withholding Tax (CWT). The rates depend on whether the seller is "habitually engaged" in the real estate business:
- Financing Companies: Generally treated as habitually engaged, with CWT rates ranging from 1.5% to 5% depending on the selling price.
- This CWT is a "down payment" on the company's annual income tax. The profit from the sale must be declared in the Annual Corporate Income Tax Return.
B. Value-Added Tax (VAT)
Since the property is an ordinary asset, the sale is a business transaction subject to 12% VAT, provided the seller is VAT-registered or the annual gross sales exceed the threshold (currently ₱3,000,000).
Note: If the property is a low-cost or socialized housing unit, it may be VAT-exempt under specific conditions set by the CREATE Act.
C. Documentary Stamp Tax (DST)
Regardless of the asset classification, a DST of 1.5% is imposed on the consideration or the value of the property, whichever is higher.
3. Comparative Summary Table
| Tax Component | Capital Asset (Rare for ROPA) | Ordinary Asset (Standard for ROPA) |
|---|---|---|
| Primary Tax | 6% Capital Gains Tax (CGT) | Corporate Income Tax (20% or 25%) |
| Withholding | Not Applicable | 1.5% to 5% CWT |
| VAT | Exempt | 12% VAT (if applicable) |
| DST | 1.5% | 1.5% |
| Basis | Gross Selling Price / Zonal Value | Net Income (for Income Tax) |
4. Key Jurisprudence and Bureau of Internal Revenue (BIR) Rulings
The Philippine Supreme Court and the BIR have consistently held that the moment a financing company or bank acquires a property through foreclosure to satisfy a debt, that property enters the company's inventory of "Real and Other Properties Acquired."
Because the acquisition is an incidental part of the company's business operations (lending), the subsequent sale is considered a sale of an ordinary asset. Even if the financing company is not a "real estate developer," the frequency and nature of its foreclosure activities classify it as a habitual seller for tax purposes.
Crucial Reminder: Once a property is classified as an ordinary asset, it remains an ordinary asset even if the company stops using it in business, unless it is officially converted through specific BIR procedures.
5. Challenges in Valuation
Financing companies often struggle with the "higher of" rule. For tax purposes, the basis is always the highest among:
- The Selling Price (per Deed of Sale).
- The Fair Market Value (per Provincial/City Assessor).
- The Zonal Value (per BIR).
This often results in a tax liability that exceeds the actual cash received, especially if the property has a high zonal value but is sold at a "fire sale" price to clear the company's books.
Would you like me to draft a sample computation for the taxes due on a specific sale price for a foreclosed property?