MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY

COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

DEPARTMENT OF ACCOUNTANCY

ACT184: INCOME TAXATION

Dealings with Properties (Capital Assets)

ABSTRACTION
Capital Assets
Ordinary Assets – assets used in business, such as:
a. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of the taxpayer.
b. Real property held by the taxpayer primarily for sale to customers in the ordinary course
of business
c. Real property used in trade or business of a character which is subject to allowance for
depreciation.
d. Real property used in trade or business of the taxpayer.

Capital Assets – any asset other than ordinary assets.

Guidelines in Determining Whether a Particular Real Property is a Capital Asset or

Ordinary Asset (RR 7-2003)
A. Real Properties shall be classified with respect to taxpayers engaged in the real estate
as follows:
i. All real properties acquired by the real estate dealer shall be considered as ordinary
asset
ii. All real properties acquired by the real estate developer, whether developed or
undeveloped as of the time of acquisition.
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 of 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. (E.g.,
Registered with HLURB or HUDCC)

B. 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.

C. Taxpayer changing business from real estate business to non-real estate business
– real properties held by these taxpayers shall remain to be treated as ordinary assets.

D. Taxpayer who originally registered to be engaged in the real estate business but
failed to subsequently operate – all real properties acquired be them shall continue to
be treated as ordinary assets.

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/business of a taxpayer
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 the taxpayer
engaged in business other than real estate business are automatically converted into
capital assets upon showing proof that the same have not been used in business for more

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

than two years prior to the consummation of the taxable transactions involving said
properties.

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 hand of the latter shall be determined in
accordance with the following rules:
i. Real property transferred through succession/donation to the heir/donee who is
not engaged in the real estate business with respect to the real property
transferred, and who does not subsequently use such property in trade or
business, shall be treated as a capital asset in the hands of the transferee.

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 property in
trade/business, shall be considered 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 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 exchange.

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.

Type of Gains on Dealings in Properties

1. Ordinary – arises from the sale, exchange, barter and other disposition, including pacto
de retro sales and other conditional sales of ordinary assets. Ordinary gains are
subject to regular income tax.
2. Capital – arises from the sale, exchange, barter and other disposition, including pacto
de retro sales and other conditional sales of capital assets. Generally, capital gains
are subject to regular income tax except for items subject to CGT.

Comparison of the Tax Treatment of Ordinary and Capital Assets

ORDINARY ASSETS CAPITAL ASSETS
How Taxed? How Taxed?
Gain is 100% Taxed SUBJECT TO FINAL TAX: Gain/Loss is recognized
Loss is 100% Deductible 1. Capital gains tax on and included in the ITR:
sale of domestic 1. For INDIVIDUAL:
Both are included in the ITR shares. Short-term = 100%
2. Stock transaction tax Long-term = 50%
on sale of shares thru
IPO 2. For CORPORATION
3. Capital gains tax on 100% recognized
sale of real properties whether ST or LT

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

classified as Capital Other Rules:

Assets 3. Capital losses are
4. allowed only against
capital gains;
4. Any net capital loss
can be carried over
(NCLCO) by an
individual taxpayer to
the next succeeding
year as a short-term
net capital loss, but
not to exceed the net
income for the year in
which the capital loss
was incurred.
5. Corporations are not
allowed any net
capital loss carry-over

Computation of Gain
Selling Price or Fair Market Value PXXX
Less: Basis of Disposed Property (XXX)
Gain PXXX

Selling price shall mean:

• In case of cash sale, the total consideration received per deed of sale
• If total consideration is paid partly in money and partly in property, the sum of money and
fair value of consideration received
• In case of exchanges, the fair value of the property received

Cost/Basis of the disposed property shall mean:

• If acquired by purchase – the cost of the property acquired. If the property acquired is
share of stock, the cost will be determined by the following methods in priority:
o Specific identification – if the shares can be specifically identified;
o Moving average method – if books of accounts is maintained by the seller where
transaction of every particular stock is recorded
o FIFO – if sticks cannot be specifically identified
• If acquired by devise, bequest, or inheritance – fair value at the time of death of the
decedent
• If acquire by gift – the LOWER of the FMV at the time of gift and the basis in the hands of
the donor or the last preceding owner by whom it was not acquired by gift.
• 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.
• Use of Basis:
o Gain or loss in transaction involving ordinary assets
o Gains or loss involving capital assets which are not subject to CGT
o Gain or loss in the sale of domestic shares not traded in the PSE

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

o Gain or loss in forced sale of real property to government in the exercise if the
latter’s power of eminent domain.

Installment Reporting of Income

It is a special method of accounting specifically provided under Tax Code whereby income on
installment sales of property during the year is allowed to be reported in installments in proportion
to the installment payments actually received which the gross profit bears to the total contract
prices computed as follows:

Taxable Income = (Gross Profit ÷ Contract Price) x Installment Received

Cases Where Income May Be Reported Under Installment Method:

1. Sale of personal or movable property by a dealer
2. Casual sale of personal property where:
a. Selling price is over P1,000
b. Initial payment is not more than 25% of selling price
c. Property is not of a kind which would be included in inventory included in inventory
if on hand at the close of the taxable year.
3. Sale of real or immovable property where initial payment is not more than 25% of the
selling price

Selling Price – the amount realized on the sale

Cash Received xxx
FMV of the Property received xxx
Installment obligations of the buyer xxx
Mortgage assumed by the buyer xxx
Selling Price xxx

Contract Price – the amount which the purchaser contracts to pay the seller
Selling Price xxx
Less: Mortgage assumed by the Buyer xxx
Balance xxx
Add: Excess of Mortgage Over Cost xxx
Contract Price xxx

Note: Contract price is not synonymous to selling price. However, the amount of contract price
may be the same with the selling price if there is no mortgage assumed by the buyer.

Initial Payments – payments received in cash/properties during the taxable year in which the
sale is made
Down payment xxx
Add: Installments received in the year of sale xxx
Total xxx
Add: Excess of mortgage over cost xxx
Initial Payments xxx

Note: RR 9-28 provides that commissions and other selling expenses paid or incurred by the
seller are not to be deducted or taken into account determining initial payments, contract price
and selling price.

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

Installment Payment of Capital Gains Tax

• Installment payment of CGT is applicable only to:
o Sale of shares of stock not traded in the PSE and real estate considered as capital
asset;
o Provided, that initial payment is not more than 25% of selling price.
• Tax due and payable:

CGT Due per Installment = (Payment Received or Collected ÷ Contract Price) x Total
CGT

Sale of Principal Residence

The sale, exchange and other disposition of principal residence for the reacquisition of new
principal residence by individual taxpayer is exempt from the 6% CGT, provided:
a. The seller must be a citizen or resident alien
b. The sale involves the principal resident of the seller-taxpayer
c. The proceeds of the sale is utilized in acquiring a new principal residence
d. The BIR is duly notified by the taxpayer of his intention to avail of the tax exemption within
30 days of the sale through a prescribed return (BIR FORM 1706) and Sworn Declaration
of Intent
e. The reacquisition of the new residence must be within 18 months from the date of sale
f. The capital gains tax is held in escrow in favor of the government
g. The exemption can only be availed once in every 10 years
h. The historical cost or adjusted basis of the principal residence sold shall be carried over
to the new principal residence built or acquired:
i. Full utilization: Cost of old = Cost of new
ii. Partial utilization: Cost of New = Cost of Old x (Utilized Portion/Total
Proceeds)
iii. CGT = Should be CGT x (Unutilized Portion/Total Proceeds)

ASSESSMENT
Do-it-yourself: Here are some problems regarding the topic, try to solve on your own and confirm
it with the given answers.

Illustrative Cases: CGT COST OF

NEW
1. Mr. X sold his principal residence for P4 million. He P0 P4.2 million
immediately repurchased a new residence for P4.2
million.

2. Mr. X sold his principal residence for P2.5 million. He 36,000 1.6 million
immediately repurchased new residence for P2 million.

3. Mr. X sold his principal residence for P2.5 million. He 180,000 2 million
immediately repurchased a new residential lot for P2
million

4. Mr. X sold one of his residential lot for P4 million. He 240,000 4.2 million
immediately repurchased a new residence for P4.2
million

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

5. Mr. X sold his residential lot for P4 million. He 240,000 4.2 million
immediately repurchased new residence for P4.2 million

6. Mr. X’ house and lot were one of the several properties 180,000 0
to be expropriated by the government to build on an
airport. The government paid Mr. X P3 million. Mr. X
leases his residence then. Mr. X opted to be subjected
to capital gains tax.

1. Cora bought a car fir P600,000 on January 2, 2015 which she used for personal purposes. On
December 1, 2017, she sells the car for P900,000 under installment. The following terms were
agreed upon by Cora and the buyer:
Down payment, December 1, 2017 P150,000
Amount paid, December 15, 2017 150,000
Installment due, December 1, 2018 300,000
Installment due, December 1, 2019 300,000

Q1: How much should Cora report as income in 2017? P150,000

Q2: Assume that the car is used for business purposes, how much should Cora report as income
in 2017? P300,000
Q3: Assume that Cora is a car dealer, how much should she report as income in 2017? P100,000

2. Cora bought a car fir P600,000 on January 2, 2015 which she used for personal purposes. On
December 1, 2017, she sells the car for P900,000 under installment. The following terms were
agreed upon by Cora and the buyer:
Down payment, December 1, 2017 P150,000
Amount paid, December 15, 2017 150,000
Installment due, December 1, 2018 350,000
Installment due, December 1, 2019 350,000

Q1: How much should Cora report as income in 2017? P33,333

Q2: Assume that the car is used for business purposes, how much should Cora report as income
in 2017? P66,667
Q3: Assume that Cora is a car dealer, how much should she report as income in 2017? P66,667

3. Isko, a real estate dealer, sold a real estate for P2,000,000 on November 29, 2017. The cost
of the property was P1,500,000. The terms of the sale were as follows:
Down payment P400,000
Monthly Installment beginning December 2017 100,000

Q1: How much is the income to be reported in 2017? P125,000

Q2: Assume that Isko is not a real estate dealer and the same is held as investment, how much
should he report as income in 2017? P0
Q3: Assume that Isko is not a real estate dealer but the real estate sold was a parcel of land
used in business. How much should he report as income in 2017? P125,000

REFERENCES

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

Tabag, E. D. (2019). INCOME TAXATION. Manila: Info Page.

Valencia, E. G. (2017). Income Taxation. Baguio City: Valencia Educational Supply.