FREQUENTLY ASKED QUESTIONS

1.) What is meant by capital asset?

Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his
trade or business, 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 RR No. 7-2003]

2.) What is meant by ordinary asset?

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

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

Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business; or

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

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]

3.) What is meant by "Stock classified as Capital Asset"?

“Stock Classified as “Capital Asset” means all stocks and securities held by taxpayers other than dealers
in securities. [Sec. 2(a) of RR No. 6-2008]

4.) What is meant by "Dealer in Securities"?

“Dealer in Securities” refers to a merchant of stocks or securities, whether an individual, partnership or

corporation, with an established place of business, regularly engaged in the purchase of securities and
the resale thereof to customers; that is one, who as merchant buys securities and re-sells them to
customers with a view to the gains and profits that may be derived therefrom. "Dealer in securities"
means any person who buys and sells securities for his/her own account in the ordinary course of
business (Sec. 3.4, SRC). [Sec. 2(b) of RR No. 6-2008]

5.) What is meant by real property?

Real property shall have the same meaning attributed to that term under Article 415 of Republic Act No.
386, otherwise known as the Civil Code of the Philippines. [Sec. 2(c) of RR No. 7-2003]

6.) What does a real estate dealer refer to?

A real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging
real properties on his own account as a principal and holding himself out as a full or part-time dealer in
real estate. [Sec. 2(d) of RR No. 7-2003]

7.) What does a real estate developer refer to?

Real estate developer shall refer to any person engaged in the business of developing real properties
into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units,
townhouses and other similar units for his own account and offering them for sale or lease. [Sec. 2(e) of
RR No. 7-2003]

8.) What does a real estate lessor refer to?

Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties
on his own account as a principal and holding himself out as a lessor of real properties being rented out
or offered for rent. [Sec. 2(f) of RR No. 7-2003]

9.) Who are considered engaged in the real estate business?

Taxpayers who are considered engaged in the real estate business shall refer collectively to real estate
dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of
engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in
the real estate business shall be deemed to be engaged in the real estate business. [Sec. 2(g) of RR No.
7-2003]

10.) Who are considered not engaged in the real estate business?

“Taxpayers not engaged in the real estate business” refer to persons other than real estate dealers, real
estate developers and/or real estate lessors. [Sec. 2(g) of RR No. 7-2003]

11.) Who are considered habitually engaged in the real estate business?

Real estate dealers or real estate developers who are registered with the Housing and Land Use
Regulatory Board (HLURB) or HUDCC. If the taxpayer is not registered with the HLURB or HUDCC as a
real estate dealer or developer, he/it may nevertheless be deemed to be engaged in the real estate
business through the establishment of substantial relevant evidence (such as consummation during the
preceding year of at least six (6) taxable real estate sale transactions, regardless of amount; registration
as habitually engaged in real estate business with the Local Government Unit or the Bureau of Internal
Revenue, etc.). However, banks shall not be considered as habitually engaged in the real estate business
for purposes of determining the applicable rate of withholding tax imposed under Sec. 2.57.2(J) of RR
No. 2-98, as amended. [Sec. 3(a) (4) of RR No. 7-2003]

12.) How can you determine whether a particular real property is a capital asset or an ordinary asset?

a) “Real properties shall be classified with respect to taxpayers engaged in the real estate business as
follows:

i) All real properties acquired by the real estate dealer shall be considered as ordinary assets.

ii) All real properties acquired by the real estate developer, whether developed or undeveloped as of the
time of acquisition, and all real properties which are held by the real estate developer primarily for sale
or for lease to customers in the ordinary course of his trade or business or which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year and all real
properties used in the trade or business, whether in the form of land, building, or other improvements,
shall be considered as ordinary assets.
iii) All real properties of the real estate lessor, whether land, building and/or improvements, which are
for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or business
shall likewise be considered as ordinary assets.

iv) All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the
sale of real property shall be considered as ordinary assets. A property purchased for future use in the
business, even though this purpose is later thwarted by circumstances beyond the taxpayer’s control,
does not lose its character as an ordinary asset. Nor does a mere discontinuance of the active use of the
property change its character previously established as a business property.” [Sec. 3(a) of RR No. 7-
2003]

b) In the case of taxpayer not engaged in the real estate business, real properties, whether land,
building, or other improvements, which are used or being used or have been previously used in trade or
business of the taxpayer shall be considered as ordinary assets. [Sec. 3(b) of RR No. 7-2003]

c) In the case of taxpayers who changed its real estate business to a non-real estate business, real
properties held by these taxpayers shall remain to be treated as ordinary assets. [Sec. 3(c) of RR No. 7-
2003]

d) In the case of taxpayers who originally registered to be engaged in the real estate business but failed
to subsequently operate, all real properties acquired by them shall continue to be treated as ordinary
assets. [Sec. 3(d) of RR No. 7-2003]

e) 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 continue to be treated as
ordinary assets. Provided however, that properties classified as ordinary assets for being used in
business by a taxpayer engaged in 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. [Sec. 3(e)
of RR No. 7-2003]

f) “Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change
their character in the hands of the buyer/transferee. The classification of such property in the hands of
the buyer/transferee shall be determined in accordance with the following rules:
i) Real property transferred through succession or donation to the heir or donee who is not engaged in
the real estate business with respect to the real property inherited or donated, and who does not
subsequently use such property in trade or business, shall be considered as a capital asset in the hands
of the heir or donee.

ii) Real property received as dividend by the stockholders who are not engaged in the real estate
business and who do not subsequently use such real property in trade or business, shall be treated as a
capital asset in the hands of the recipients even if the corporation which declared the real property
dividends is engaged in real estate business.

iii)The real property received in an exchange shall be treated as ordinary asset in the hands of the
transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a
taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate
business, will use in business the property received in the exchange.” [Sec. 3(f) of RR No. 7-2003]

g) In the case of involuntary transfers of real properties, including expropriations or foreclosure sale, the
involuntariness of such sale shall have no effect on the classification of such real property in the hands
of the involuntary seller, either as capital asset or ordinary asset as the case may be. [Sec. 3(g) of RR No.
7-2003]

13.) What is the basis in the valuation of real property?

The value of the real property will be based on the selling price, fair market value or zonal value as
determined by the Commissioner of Internal Revenue or the fair market value as shown in the schedule
of values of the Provincial or City Assessor, whichever is higher.

If there is no zonal value, the taxable base shall be the gross selling price per sales documents or the fair
market value that appears in the latest tax declaration, whichever is higher.

If there is an improvement, the FMV, based on the latest tax declaration at the time of the sale or
disposition, duly certified by the City/Municipal Assessor shall be used. No adjustments shall be added
on the said value, provided that the tax declaration bears the upgraded fair market value of the said
property pursuant to Section 219 of Republic Act No. 7160, otherwise known as the Local Government
Code of 1991 and the last paragraph of the Local Assessment Regulations No. 1-92 dated October 6,
1992.
However, in case the tax declaration presented was issued three (3) or more years prior to the date of
sale or disposition of the real property, the seller/transferor shall be required to submit a certification
from the City/Municipal Assessor whether or not the same is still the latest tax declaration covering the
said real property. Otherwise, the taxpayer shall secure its latest tax declaration and shall submit a copy
thereof duly certified by the said Assessor. (RAMO 1-2001)

14.) What is meant by "Net Capital Gains"?

"Net Capital Gains" means the excess of the gains from sales or exchanges of capital assets over the
losses from such sales or exchanges. [Sec 2(o) of RR 6-2008]

15.) What are the rules for the determination of amount and recognition of gain or loss in the sale,
barter, or exchange of shares of stock not traded through the Local Stock exchange?

A. “Determination of Selling Price. — In determining the selling price, the following rules shall apply:

a.1) In the case of cash sale, the selling price shall be the total consideration per deed of sale.

a.2) If the total consideration of the sale or disposition consists partly in money and partly in kind, the
selling price shall be sum of money and the fair market value of the property received.

a.3) In the case of exchange, the selling price shall be the fair market value of the property received.”
[Sec. 7 (c) (c.1) RR No. 6-2008]

a.4) “Where property, other than real property referred to in Section 24(D), is transferred for less than
an adequate and full consideration in money or money's worth, then the amount by which the fair
market value of the property exceeded the value of the consideration shall be deemed a gift, and shall
be included in computing the amount of gifts made during the calendar year: Provided, however, that a
sale, exchange, or other transfer of property made in the ordinary course of business (a transaction
which is a bona fide, at arm’s length, and free from any donative intent) will be considered as made for
an adequate and full consideration in money’s worth.” (Sec. 16, RR No. 12-2018)

B.) Definition of "fair market value" of the Shares of Stock.

b.1) “In the case of listed shares which were sold, transferred or exchanged outside of the trading
system and/or facilities of the Local Stock Exchange, the closing price on the day when the shares are
sold, transferred, or exchanged. When no sale is made in the Local Stock Exchange on the day when the
Listed shares are sold, transferred, or exchanged, the closing price on the day nearest to the date of
sale, transfer or exchange of the shares shall be the fair market value.” [Sec. 7 (c.2.1) RR No. 6-2008]

b.2) “In the case of shares of stock not listed and traded in the local stock exchanges, the value of the
shares of stock at the time of sale shall be the fair market value. In determining the value of the shares,
the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair
market values. The net of adjusted asset minus the liability values is the indicated value of the equity.

The appraised value of real property at the time of sale shall be the higher of –

1. The fair market value as determined by the Commissioner of Internal Revenue, or

2. The fair market value as shown in the schedule of valued fixed by the Provincial and City Assessors, or

3. The fair market value as determined by Independent Appraiser.” (Sec. 2, RR No. 6-2013)

b.3) In the case of a unit of participation in any association, recreation or amusement club (such as golf,
polo, or similar clubs), the fair market value thereof shall be its selling price or the bid price nearest
published in any newspaper or publication of general circulation, whichever is higher. [Sec. 7 (c.2.3) RR
No. 6-2008]

C.) Determination of Gain or Loss from Sale or Disposition of Shares of Stock. — The gain from the sale
or other disposition of Shares of Stock. — The gain from the sale or other disposition of shares of stock
shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining
gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount
realized. The amount realized from the sale or other disposition of property shall be the sum of money
received plus the fair market value of the property (other than money) received, if any. [Sec. 7 (c.3) RR
No. 6-2008]

16.) What are the applicable tax rates of Capital Gains Tax (CGT) under the National Internal Revenue
Code of 1997, as amended by Republic Act No. 10963/ TRAIN Law?

A. For Real Properties – Six percent (6%)

B. For Shares of Stocks Not Traded in the Stock Exchange:

Effective January 1, 2018 to present (Republic Act No. 10963 or TRAIN Law)

A. For Individual - 15 %

B. For Corporation:

B.1 Domestic - 15 %

B.2 Foreign:

B.2.1 Not Over P100,000 - 5.0 %

B.2.2 On any amount in excess of P100,000 - 10 %

Effective January 1, 1998 to December 31, 2017 (Republic Act No. 8424/NIRC)

Not over P 100,000 – Five percent (5%)

On any amount in excess of P 100,000 – Ten percent (10%)

17.) Who/what are considered exempt from the payment of Final Capital Gains Tax?

Dealer in securities, regularly engaged in the buying and selling of securities

An entity exempts from the payment of income tax under existing investment incentives and other
special laws

An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate
control

A government entity or government-owned or controlled corporation selling real property

If the disposition of the real property is gratuitous in nature

Where the disposition is pursuant to the CARP law

18.) Who are conditionally exempt from the payment of Final Capital Gains Tax?

Natural persons who dispose their principal residence, provided that the following criteria are met:

The proceeds of the sale of the principal residence have been fully utilized in acquiring or constructing
new principal residence within eighteen (18) calendar months from the date of sale or disposition;

The historical cost or adjusted basis of the real property sold or disposed will be carried over to the new
principal residence built or acquired;

The Commissioner of Internal Revenue has been duly notified, through a prescribed return, within thirty
(30) days from the date of sale or disposition of the person’s intention to avail of the tax exemption;

Exemption was availed only once every ten (10) years;

In case there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed
to have been realized from the sale or disposition will be subject to Capital Gains Tax.

In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and
shall deduct from the agreed selling price/consideration the 6% capital gains tax which shall be
deposited in cash or manager’s check in interest-bearing account with an Authorized Agent Bank (AAB)
under an Escrow Agreement between the concerned Revenue District Officer, the Seller and the
Transferee, and the AAB to the effect that the amount so deposited, including its interest yield, shall
only be released to such Transferor upon certification by the said RDO that the proceeds of the
sale/disposition thereof has, in fact, been utilized in the acquisition or construction of the
Seller/Transferor’s new principal residence within eighteen (18) calendar months from date of the said
sale or disposition. The date of sale or disposition of a property refers to the date of notarization of the
document evidencing the transfer of said property. In general, the term “Escrow” means a scroll, writing
or deed, delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the
latter until the happening of a contingency or performance of a condition, and then by him delivered to
the grantee, promise or obligee.

19.) What is an Electronic Certificate Authorizing Registration (eCAR)?

The eCAR is an electronically generated Certificate Authorizing Registration issued by the Commissioner
or his duly authorized representative attesting that the transfer and conveyance of land,
buildings/improvements or shares of stock arising from sale, barter or exchange have been reported and
the taxes due inclusive of the documentary stamp tax, have been fully paid.

20.) What is Electronic Certificate Authorizing Registration System (eCAR System)?

The eCAR System is a stand-alone system developed and owned by the BIR for the automated creation
of eCAR which is the basis for transferring the real and personal properties from the transferor to the
transferee after payment of the correct taxes and other dues that allows monitoring through audit trails
and generated reports.

21.) Are manually issued Certificate Authorizing Registration (CAR) that are outstanding and not yet
presented to the Registry of Deeds (RD) still valid?

All manually issued CARs that are outstanding and not yet presented to the RD are no longer valid. The
said CARs shall be replaced with an eCAR by the concerned Revenue District Offices or Large Taxpayers
Divisions. For CAR involving multiple properties in which some of the properties are already transferred
in RD, only those untransferred property/ies shall be issued with an eCAR.

A certification fee shall be charged for each released eCAR issued/reprinted after affixture of Thirty
Pesos (P30.00) Documentary Stamp Tax (DST) on Certificates (RA 10963 or TRAIN Law) and the
prescribed Certification Fee of One Hundred Pesos (P100.00) under Executive Order No. 197 to the
taxpayer/authorized representative.