THE "2-YEAR VACANT" MYTH

One of the most common misconceptions I still hear in RE taxation is this:

“A condo that has stayed vacant for more than 2 years automatically becomes a capital asset, so its sale is no longer subject to VAT.”

I’ve heard this argument from brokers, accountants, and even lawyers.

The confusion usually comes from BIR Revenue Regulations (RR) No. 7-2003, which discusses “idle” assets.

Yes, the RR says that ordinary assets may be converted into capital assets if they have not been used in business for more than 2 years.

But the same provision also states that this rule applies only to taxpayers NOT engaged in RE business.

Example:

Suppose a manufacturing firm shuts down operations and leaves behind a factory that remain unused for several years.

Since:

the company was not engaged in the RE business; and

the plant was not used in business for more than 2 years,

the idle factory may eventually be treated as capital assets. If sold, the transaction will no longer be subject to VAT.

Now compare that to someone leasing properties.

Under RR 7-2003, taxpayers engaged in the RE business treat their properties as ordinary assets. And once classified as ordinary assets, the regulation is very strict about their treatment.

In fact, RR 7-2003 expressly states:

“In the case of subsequent NON-OPERATION by taxpayers originally registered to be engaged in the RE business, all real properties originally acquired by it SHALL CONTINUE to be treated as ordinary assets.”

In other words, merely leaving a property vacant for 2 years does NOT automatically convert it into a capital asset if the owner is engaged in the RE business.

This is why the absence of a Certificate of Non-Tenancy (CNT), or even the presence of one indicating when the unit became vacant, can become an issue. The absence of a CNT or a CNT with dates will establish that the unit was previously leased out, which in turn supports the position that the owner is engaged in the RE business.

So if your plan is to convince the BIR that a previously leased property should't be subjected to VAT simply because it stayed vacant for 2 years, that argument is unlikely to work.