October 2018 GAIN OR LOSS FROM SALE OR EXCHANGE OF PROPERTY : Atty. C, Llamado Sale or exchange of properties are classified into: ¢ N » - . Sales or Exchanges Where Gain, but Not Loss is Recognized Sales resulting to Capital Gains (subject to “CGT”) ) On the sale of domestic shares. b) On the sale of real property classified as capital assets. . Tax-Free Exchanges - where No Gain nor Loss is Recognized | a) Tax-free exchanges pursuant to a corporate reorganization under Section 40(C) ‘the Tax Code (merger or: consolidation) b) Like-Kind Exchanges = (2) of a) Exchanges not solely in kind pursuant to a corporate reorganization where boot is received. b) ‘Transactions between related persons under Section 36(B) of the Tax Code. ©) Illegal transactions. (a) Sale or Exchange of Ordinary Assets; and (b) Sale or Exchange of Other Capital Assets (Le. capital assets other than those whose sale is subject to CGT) ~ If the transaction is a sale, the gain or loss to be recognized is computed as follows: Sale 20K Less: Basis (xxx) Gain (Loss) xxx ~ If the transaction is an exchange, the property received must be essentially different from the property disposed of, otherwise no gain or loss is recognized. The gain or loss is computed as follows: FMV of the property received Less: Basis of property given Gain (Loss) iesOctober 2018 BASIS a) I€property was acquired by purehase, the basis of the property is the cost fo the buyer. ) If property was acquired by inkeritance, the basis of the property is the FMV of the property at the time of death of the decedent (step-up in basis). ©) If the property was acquired by gift, the basis of the property is the basis in the hands of the donor. Except that if such basis is greater than the FMV of the property at the time of the gift, then the basis shall be such FMV for the purpose of determining the d Uf property was acquired for less than an adequate consideration, the basis of th property is the amount paid. ©) If property was acquired in a previous tax-fiee exchange where gain or Tess is not recognized under Section 40(C)(2), the basis is the substituted basis. | | | Adjusted Basis ~ After a property is acquired, its basis can be increased by improvements that materially add to its value or life, and is decreased by accumulated depreciation. | Formula: | Basis of property 000% Plus: Improvements KK | Less: Accunmulated Depreciation (ox) | Adjusted Basis xxx j Use of Basis i Basis is used to determine: | a) Gain or loss in transactions involving ordinary assets. b) Gain or loss involving capital assets which are not subject to the CGT. ©) Gain or Joss in the sale of domestic shares nor traded in the stock exchange! ss in forced sale of an individual texpaver of real property to go in f the letter’s power of eminent domain; and €) Gain or loss i the sale of real property ciassitied as capital asset of a RFC|or NRFC.CLASSIFICATION OF PROPERTIES FOR TAX PURPOSES a) Stock included in inventory; b) Property primarily held for sale; c Asset which is not an ordinary asset: (1) personal or non-business property or ©) Property used in business which | (2) asset held merely for investment, or 2 is capitalized; (3) property not used in business 4) Real property used in the trade, business, or profession of the How taxed? How Taxed? Gain is 100% included in the ITR. Subject to FTs: | Gain/Loss (“G/L") is recognized, but only Net Capital Gain is Loss is 100% deducted in the ITR if | 1) Capital gains tax on | included in the ITR: taxpayer itemizes deductions. sale of domestic 5 1) If taxpayer is an individual: shares; 2) Capital gains tax on sale of real property ST! G/L = 100% recognized located in the LT? G/L= 50% recognized Philippines classified ‘as capital assets 2) Hf taxpayer is a corporation: 100% recognized whether ST or LT Other Rules: ext su 3) Capital losses are allowed | only against capital gains 4) Any net capital loss (net capital loss carry-over) of an individual taxpayer can be carried over to the next succeeding year NCL, but not to exceed the net income for the year in which the capital loss was incurred, ions are not allowed rasa ST carry-over. 3 Short-term — holding period of taxpayer is not more than 1 year * Long-term — holding period of taxpayer is more than 1 year.October 2018 Other Transactions Resulting in Capital Gains or Losses Where There is NO SALE 1) When stocks or bonds held as capital assets become worthless, capital loss is recognized. 2) When bonds (held as capital assets) are retired. 3) Gains or losses from failure to exercise options (option gains or losses). 4) When the assets of a corporation are distributed in complete liquidation thereof (iguidating dividend). Capital gain or loss to the shareholder is recognized. 5) Redemption of preferred shares, 6) Liquidation of partnership. Capital gain or loss is recognized to the partner. Formula: Amount received for his partnership interest Less: His investment in the partnership Hiss Gain or Loss to Partner (subject io holding period qualification) 7) Gains or losses from short sales. “Short selling” is selling something one does not own in the future at a particular price in the hope that the property goes down in value. For tax purposes, a short sale is deemed consummated upon delivery of the property to cover the short sale. WASH SALE LOSS uisites: 1) Sale of securities at a loss, and 2) Identical securities were purchased eae a 61-day period, beginning 30 days before the sale, and ending 30 days after the sal 3) The taxpayer i eilher () not a dealer in seustics, or (b) iff dealer, the sale was not ‘made in the ordinary course of business. Notes: a) “Purchase” includes entering into a contract or option to acquire identical securities. ) IF taxpayer is a dealer in securities and the sale was made in the ordinary course of business, the loss on the sale is deductible in the ITR. ©) IF taxpayer is not a dealer in securities or is a dealer but the sale was not made in the ordinary course of business, the loss on the wash sale is a capital loss, but is not deductible against capital gains, Formula for Non-Deductible Loss: No. of Shares Acquired Within 61 day period x Loss = Non-deductible Loss ‘No, of Shares Sold + Formula for Tax Basis of Re-Acquired Shares: Cost of Acquisition + Wash Sale Loss ‘New Tax Basis/Cost ERE‘TAX-FREE EXCHANGES OF PROPERTIES PURSUANT TO A MERGER OR CONSOLIDATION (CORPORATE REORGANIZATION) (1) IF in pursuance of a plan of merger or consolidation: (@) Acor tr Which is a party to a merger or consolidation, exchanges property solely for stock” in a Corporation, which is a party to the merger or consolidation; or 1 OA, u), exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock! of another corporation also a party to the merger or consolidation or (©) A security holder (transferor), of a corporation, which is a Party to the merger or consolidation) exchanges his securities in Such corporation, solely for stock’ or “ceurties in another corporation, a party to the merger or consolidation or | OR | (2) A person (transferor), transfers his property to a corporation in exchange for stobk® or unit of participation in such a corporation of which, as a result cp such exchange said Person, alone, or together with others, not exceeding four ) persons’, gains control of said corporation (Sec. 40 (C) (2), NIRC) i Tax Consequences: Oper anstr shall NOT recognize gain or lows (i, no COT, no income tax, no CWT, no donor's tax, no VAT); and (2) The basis (Cost) of the stock or ‘securities received by the transferor shall be the basis) Ne basis of the stock, propery, or securities transfered (substiterd basis), Example: | Marian bought 100 shares of X Corporation at PS per share. Later X decided to Canes with ¥ Corporation. “Pursuant to which Marian exchanged her 100 shares of X Corporation for 500 shares of Y Corporation which hada FMV at tia tine of PT ann (@) What is the gain of Marian? Fair market value of Y shares received (P7 x 500 shares) P 3,500 Less: Basis in X shares transferred (PS x 100 shares) (500) Gain P 3,000 However, this gain will not be recognized and therefore is not taxable. ae 3 Whether voting oF nom 4 Whether voting or non-voting, { Whether voting or non-voting £ Voting. 7 The 4 other ‘must also be transferor of a | * However if the pro uated by the rsa in buns ord fe sl ret, theme properties | shal be subject to VAT (equivalent to 12% ofthe FMV ofthe propery tesiorea | ’ 5 |2018 (b) What will the basis of the Y shares of Marian? The basis of the Y shares will be the same basis in her X shares ~ P1/share x 500 shares = 500, (c) If Marian sels all the 500 Y shares to Ivy for 20,000, what will be the taxx to Marian? Selling price of ¥ shares P20, Less: Basis (P1 x ¥ 500 shares) (500) Gain = 19, sala shel be its te not med in th stock exchange andar capital assets, the P19,500 ‘gain shall be subject to the 15% CGT. | HOWEVER, if the “rransferor” receives not only stock or securities, but also money or property, GAIN but NOT LOSS shall be recognized. Note: The money and/or property received is called “hoot.” Tax Consequeaces: (1) Gain recognized < Money + FMV of Property Received EXC: No gain is recoguized if the transferor is a corporation and the boot is distributed in accordance with the plan of merger or consolidation, @) Basis of the shares received by the transferor shell be computed as follows: | Formula — Cost (basis) of the stack or property transferred P xox | Less: (a) Money received Pex (b) FMV of property received 0 _ (009 Balance P xxx Add: (@) Gain recognized on the exchange Pox (©) Amouni treated as dividend ox xx. Basis (Cost) of the stock received P vox Example: In the previous example, pursuunt to a merger Marian exchanged her 100 X shares for 300 Y shares (FMV = ®7 per share) plus iand (FMV = P5,000) plus 2,000, \ (a) How much gain shall Merian recognize? 7,000October 2018 Fair market value of ¥ shares received (P7 x 500 shares) P 3,500, Plus: Boot: Land 5,000 Cash 2,000 7,000 10,500 Less: Basis in X shares transferred (P5 x 100 shares) (500) Gain P __ 10,000 But, Gain to be recognized shall not exceed the boot received in the amount of (b) What will the basis of the Y shares of Marian? PSOO Cost (basis) of the X shares transferred P 500 Less: (a) Money received P 2,000 (b) FMY of land received 5,000. _(7,000) Balance P (6,500) Add: Gain recognized on the exchange 7,000 Basis (Cost) of the Y shares received 500 (c) What is the basis of the land received in the hands of Marian? P5,000