Why should we distinguish if it's capital or ordinary? Tax.
1. Capital Assets are defined in Tax Code
The term “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), but does not include the following: stock in trade of the taxpayer or other 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; property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; property used in the trade or business, of a character which is subject to the allowance for depreciation ; and real property used in trade or business of the taxpayer.
It means capital assets are properties that are not used in trade or business. So the opposite will be the ordinary assets.
Notes: The sale of capital assets (land and/ or building) is subject to capital gains tax at the rate of six percent based on the gross selling price or fair market value at the time of sale, whichever is higher and the corresponding documentary stamp tax (DST). Conversely, sale of ordinary assets is subject to the creditable withholding tax at a rate ranging from 1.5 percent- 6 percent and consequently to ordinary income tax, corresponding DST and likewise to the 12 percent VAT.
Notes: Capital Gain tax is not imposed on gains. Even you sell a property at a loss, you should pay 6%. It's rather a transaction tax. Same as stock transaction tax.
Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall nonetheless continue to be treated as ordinary assets. Real property initially acquired by a taxpayer engaged in real estate business shall not result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle. However, properties classified as ordinary assets for being used in business by a taxpayer engaged in the business other than real estate business are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties.
So, even you are not in real estate business, it takes at least 2 years.
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