Creditable Withholding Tax (CWT) Rules on Sale of Real Property Classified as Ordinary Asset

RR No. 2-98, Sec. 2.57.2(F): CWT on Sale of Real Property Classified as Ordinary Asset

Source: Revenue Regulation No. 02-98 (1998)

Key rule: A sale, exchange, or transfer of real property classified as an ordinary asset is subject to creditable withholding tax (CWT). The CWT is based on the higher of the gross selling price or the fair market value under Sec. 6(E) of the NIRC.

 

1. Quick Classification

Question	If “Yes”	Tax treatment
Is the property an ordinary asset?	The property is stock in trade, held primarily for sale to customers, or used in the seller’s business	Apply the CWT rules in Sec. 2.57.2(F) of RR No. 2-98
Is the property a capital asset?	The property is not an ordinary asset and is not used in the seller’s business	The transaction is generally subject to capital gains tax, not the CWT under this provision
Is the seller habitually engaged in the real estate business?	The seller is registered with HLURB/HUDCC or proves habitual real estate activity	Apply the graduated CWT rates of 1.5%, 3%, or 5%
Is the seller not habitually engaged in the real estate business?	The seller does not qualify as a habitual real estate seller	Apply 6% CWT
Is the seller exempt under Sec. 2.57.5 of RR No. 2-98?	The seller qualifies for an exemption recognized by the regulations	No CWT is imposed, subject to proof of exemption

 

2. Ordinary Asset Versus Capital Asset

Classification	General description	Tax normally applicable to sale
Ordinary asset	Real property held as stock in trade, held primarily for sale to customers, or used in the seller’s trade or business	CWT, plus applicable ordinary income tax and possibly VAT and DST
Capital asset	Real property that does not fall within the statutory definition of an ordinary asset	Final capital gains tax, where applicable, plus DST and other applicable taxes
Bank’s foreclosed property	Banks are not treated as habitually engaged in the real estate business merely because they sell foreclosed properties	The applicable CWT classification must be determined, but the bank is not automatically treated as a habitual real estate seller

The distinction is important because the CWT under this provision applies only to real property other than capital assets. The Supreme Court has recognized that CWT on ordinary assets is different from final withholding tax on capital assets: CWT is an advance payment creditable against the seller’s annual income tax, while final withholding tax generally satisfies the tax due on the particular income. Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo (2010) Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo (2010)

3. Tax Base and CWT Rates

Seller’s status	Gross selling price or FMV	CWT rate
Seller is exempt under Sec. 2.57.5	Any amount	Exempt
Seller is habitually engaged in real estate business	₱500,000 or less	1.5%
Seller is habitually engaged in real estate business	More than ₱500,000 but not more than ₱2,000,000	3%
Seller is habitually engaged in real estate business	More than ₱2,000,000	5%
Seller is not habitually engaged in real estate business	Any amount	6%

 

Tax base

Transaction	Tax base
Sale for cash or deferred payment	The higher of the consideration stated in the sales document or the applicable fair market value under Sec. 6(E) of the NIRC
Exchange	The fair market value of the property received in exchange
Installment sale	Generally, the higher of the gross selling price or fair market value determined under the applicable installment-sale rules
Assignment of rights	The higher of the consideration in the deed of assignment or the fair market value at the time of assignment

The Supreme Court has upheld the use of gross selling price or fair market value as the basis for withholding because the buyer or withholding agent ordinarily knows the transaction value but does not know the seller’s eventual net income. The amount withheld remains creditable against the seller’s final income tax liability. Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo (2010)

 

4. How to Determine Whether the Seller Is Habitually Engaged in Real Estate Business

Evidence or circumstance	Effect
Seller is registered with HLURB or HUDCC	Sufficient under the quoted regulation to establish habitual engagement
Seller is not registered with HLURB or HUDCC	Seller may submit other satisfactory evidence
Seller completed at least six taxable real estate transactions in the preceding year	Example of satisfactory evidence under the quoted regulation
Seller is a bank	Banks are not considered habitually engaged in the real estate business for this purpose

The seller’s classification must be determined from the facts and supporting documents. Merely owning or selling one property does not automatically establish that the seller is habitually engaged in the real estate business.

5. Classification of the Buyer

Buyer	Installment sale	Cash or deferred-payment sale not treated as installment
Individual not engaged in trade or business	No CWT is withheld from the periodic installments. The full applicable CWT is withheld from the last installment or from the immediately preceding installment or installments if the last installment is insufficient.	The CWT is withheld from the first installment.
Buyer engaged in trade or business, including a corporation	CWT is withheld from every installment based on the ratio of the actual collection to the agreed consideration in the Contract to Sell, applied to the higher of the gross selling price or fair market value.	The CWT is withheld from the first installment.
Government office or government-controlled entity acting as buyer	It generally acts as a withholding agent under the applicable withholding rules.	It must withhold and remit the applicable CWT when required.

 

6. Installment and Deferred-Payment Rules

 

A. Individual buyer not engaged in business

Payment arrangement	Rule
Installment plan	Payments during the year of sale do not exceed 25% of the selling price. No CWT is withheld from periodic installments.
Last installment	The CWT is withheld from the last installment or, if insufficient, from the immediately preceding installment or installments until fully paid.
Cash basis or deferred-payment sale not on installment plan	Payments during the year of sale exceed 25% of the selling price. The CWT is withheld from the first installment.

 

B. Buyer engaged in trade or business

Payment arrangement	Rule
Installment plan	CWT is withheld from every installment.
Computation per installment	Apply the ratio of actual collection to the agreed consideration under the Contract to Sell to the higher of the gross selling price or fair market value determined at the relevant time.
Cash basis or deferred-payment sale not on installment plan	The CWT is withheld from the first installment.
Interest	Interest incidental to installment payments is excluded from the consideration for this CWT computation and is subject to ordinary income tax.

 

7. Compliance and Registration Requirements

Requirement	Rule
Payment of CWT	The buyer or withholding agent must withhold and remit the required CWT.
Certificate Authorizing Registration	No CAR or Tax Clearance Certificate may be issued to the buyer unless the CWT due on the transaction has been fully paid.
Contract to Sell	For installment or deferred-payment transactions, the Contract to Sell must be attached to the Deed of Absolute Sale.
Submission to RDO	The notarized originals of the Contract to Sell and Deed of Absolute Sale must be presented to the RDO with jurisdiction over the property for validation.
Seller’s income tax	The CWT is not the seller’s final income tax. It is credited against the seller’s annual income tax liability.
Refund or additional payment	If the CWT exceeds the seller’s final tax due, the seller may claim a refund or tax credit. If the seller’s final tax exceeds the CWT, the seller pays the deficiency.

The Supreme Court has explained that CWT is an advance tax payment. At the end of the taxable year, the seller declares the income, credits the tax withheld, and either pays the balance or claims a refund or tax credit for any excess. Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo (2010)

 

8. Documentary Stamp Tax in Installment Transactions

Event	DST rule
Contract to Sell executed	The DST does not necessarily accrue at this stage under the quoted rule.
Deed of Absolute Sale executed after full payment	The DST becomes due upon execution of the Deed of Absolute Sale.
DST tax base	The higher of the gross selling price or fair market value at the time the Contract to Sell was executed.

The DST on deeds and conveyances of real property is imposed under Sec. 196 of the NIRC. NIRC (1997)

 

9. Assignment of Rights

Situation	Tax treatment
Buyer fully paid the property but assigns the right before execution of the Deed of Sale	The assignment is treated as a separate sale. It may be subject to CWT or final capital gains tax, as applicable, and DST.
Buyer assigns the property before fully paying the original seller	The original buyer is taxed on the realized gain. The gain is the difference between the agreed consideration received from the assignee and the amount actually paid to the original seller.
Assignment produces no gain	If the assignee pays only the amount already paid by the original buyer and the original seller has not yet been fully paid, there may be no realized gain and consequently no CWT or capital gains tax, subject to the facts and applicable BIR ruling. BIR Ruling No. 304-2022 (2022)

 

10. Immediate Decision Guide

Step	Question	Result
1	Is the property real property?	If no, this provision does not apply.
2	Is it an ordinary asset of the seller?	If no, analyze under the capital-asset rules instead.
3	Is the seller exempt from CWT?	If yes, no CWT, subject to proof of exemption.
4	Is the seller habitually engaged in real estate business?	If yes, use the 1.5%, 3%, or 5% graduated rate.
5	If not, is the seller a non-habitual real estate seller?	Apply the 6% rate under the quoted provision.
6	What is the tax base?	Use the higher of the stated consideration or applicable fair market value.
7	Who withholds?	The buyer or withholding agent.
8	Is the buyer an individual not engaged in business?	Apply the special installment rules for individual buyers.
9	Is the buyer engaged in trade or business?	Withhold on every installment if the sale qualifies as an installment sale.
10	Has the CWT been fully paid?	If no, the CAR or Tax Clearance Certificate should not be issued.
11	Is there an assignment of rights?	Determine whether it is a separate sale or whether the original buyer realized a gain.