Difference between capital asset and ordinary asset?

 

• What is a capital asset?

Capital assets refer to all real properties held by a taxpayer, whether connected with his trade or business or not, and which are not included among the real properties considered as ordinary assets under Sec. 39(A)(1) of the Code. [Sec. 2(a) of RRNo. 7-2003]

• What is an ordinary asset?

Ordinary assets refer to all real properties specifically excluded from the definition of capital assets under Sec. 39(A)(1) of the Code, namely:

1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or
4. Real property used in trade or business of the taxpayer.

Real properties acquired by banks through foreclosure sales are considered as ordinary assets. [Sec. 2(b) of RR No. 7-2003]

 

• Paying VAT

If the seller-taxpayer is a VAT-registered person, the sale of his ordinary asset is subject to VAT.

A person should register as a VAT entity if his gross annual sales and/or receipts exceed P1,919,500.00 in a year. If he is not originally registered as a VAT entity but he exceeded the threshold, he should submit BIR Form No. 1905 (Taxpayer Registration Update) to change to VAT.