October 2019 GAIN OR LOSS FROM SALE OR EXCHANGE OF PROPERTY “Atty. C. Liamado Sale or exchange of properties are clasified int: 1, Sales resulting to Capital Gains (subject to“CGT") 8) On the sale of domestic shares ) On the sale of real property classified as capital assets. 2, Tax-Free Exchanges - where No Gain nor Loss is Recognized. 1) Taxfee exchanges pursuant oa corporate reorganization under Section 40(CX2) of the Tax Code (merger ar consolidation) ») Like-Kind Exchanges 3, Sales or Exchanges Where Gain, but Not Loss is Recognized 8) 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. ©) legal transactions. 4, (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) : ~ Ifthe transaction isa sale, the gain o loss to be recognized is computed as follows: Sale oo Less: Basis Gs) 1 Gain(Loss) coef i + Ifthe transaction is an exchange, the propery received must be essetilly different from the property disposed of, ptherwise no gain or loss is recognized. The gain or loss is computed as follows: FAV of the property received yoo Less: Basis of property given (ox) Gain (Loss) oeOctober 2019 Basis 1) If propery was acquired by purchase. the basis ofthe propery isthe costo the buyer 1) IF property was acquired by iaheritance, the basis of the property is the FMV of the Property atthe ume of death of the devedent (step-up in bass) ©) Ifthe property was acquired by gift, the basis ofthe property isthe basis inthe hands of the donor Except that if such besiss greater than the FM ofthe pronety atthe time of ‘the gift then the basis shall be such FMV forthe purpose of determining the Tos 4) If property was acquired for less than an adequate consideration, the basis of the property is the amount paid ©) If property was acquired in a previous tarfiee exchange where gain or loss is not ‘ecognized under Section 40(CX2), the bess isthe subsutued bass, Adjusted Basis = After a property is acquired, its bass can be increascd by improvements that materially ‘dd to its value or lite, and is dereased by accumulated depreciation Formule: Basis of property 00x Plus: Improvements 0x Less: Accumulated Depreciation oad Adjusted Basis x Use of Basis ‘Basis is used to determine 48) Gain or loss in transitions involving ordinary osses. 1) Gain or loss invalving capital essets which are ant subject tothe CGT. {©} Gain or lss nthe sao of damesticrhares not taded in the stock exchange. 4) Gain or loss in forced sale of en individual taxpayer of real property to goverment in the exereise af the later's power of eminent domaun, and €) Gain or loss. an the sale of real property classified as capital asset of an RFC or NRFC.October 2019 CLASSIFICATION OF PROPERTIES FOR TAX PURPOSES Ordinary Assets ') Stock included in inventory, | Asset which is not an ordinary asset: +) Property primarily held forsale; | (1) personal or non-business property of 6) Property used in business which | (2) asset held merely for investment, or is capitalized; @) property not used in business 4) Real property used in the trade, business, or profession ofthe taxpayer How taxed? How Taxed? Gain is 100% included in the ITR. | ~Sale of (a) domestic shares | Sale of capital assets oiher| held as capital assets, (b) real | thane domestic shares held as ‘Leas is 100% deducted in the ITR if | properties inthe Philippines | capital assets, or RPCA. ‘taxpayer itemizes deductions. classified as capital assets “(RPCA) Subject to Pts] Gain/Lass GIL) is recognized, but only Net Capital Gain is 1) Capital gains tx on | included in the ITR: sale of domestic ‘shares; 1) If taxpayer is an individual: 2) Capital gains tax on sale of eal property | ST! G/L = 100% recognized Jocated in the LIP GiL= 50% recognized Philippines classified ascepitalassets | 2)f taxpayer is a corporation: 100% recognized whether ST or LT. Other Rules: 3) Capital losses are allowed ‘only against capital guins 4) Any net capital lose (et capital toss carry-over of an individual taxpayer canbe caried overt fhe next succeeding var os « ST [NCL but not to exceed the net ‘income forthe yea in which the capital loss was incurred. Corporations are not allowed "Shortt bling pod of txpayer eet rere than 1 yet. > Longer —hoing period of unpayers mre tan I yeaOctober 2019 Other Transactions Resulting in Capital Gains or Losses Where There is NO SALE 1). When stocks or bonds held as capital assets become wortbles, capital los is recognized. 2) When bonds (held as capita assets) are retired. '3) Gains or losses from failure to exercise options (option gains or losses). 4) When the assets of corporation are distributed in complete liquidation thereof (Giauidsting dividend), Capital pain or loss tothe shareholder is recognized. '5) Redemption of preferred shares 6) Liquidation of partnership. Capital gan or loss is reeognized tothe partner. Forula: Amount received for his partnership interest Less: His investment inthe parmership Gain or Loss to Partner (subject to holding period qualification) 7) Gains or losses from shor sales. “Short selling” is selling something one does not own inthe future ata particular price in the hope thatthe property goes down in value. For tax purposes, a short sale is deemed cconsuramated upon delivery of the property to cover the shor sale. WASH SALE LOSS Requisite: 1) Sale of securities ata loss, and 2) Identical securities were purchased within a 61-day period, beginning 30 days before the sale, and ending 30 days after the sale. 3) The taxpayer is either (a) not a dealer in securities, or (b) ia dealer, the sale was not ‘made inthe ordinary course of business. Notes: 1) “Purchase” includes entering into a contractor option to acquire identical securities. ) IF taxpayer isa dealer in securities and the sale was made in the ordinary course of ‘business, the loss on the sale is deductible in the TTR. ©) IF taxpayer is nota dealer in securities or is dealer but the sale was not made in the ‘ordinary course of business, the deductible against capital gains. Eormula for Non-Deductible Low: No.of Shares Acauired Within 61 day period x Loss = Non-doducible Loss No of Shares Sold» Formula for Tax Basis of Re-Acgul 7 Cost of Acquisition woo + Wash Sale Loss 90x New Tax BasisiCost orctober 2019 i i OF PROPERTIES PURSUANT TO A! MERGER OR ConsoLIDATION (CORPORATE REORGANIZATION) (2) Fin pursuance of plan of merger or consolidation: (@) Acer us ‘which is a party to a merger or consolidation, exchanges ‘Property solely Jor stock’ in a corporation, which is a party fo the merger or ‘consolidation; or (®) A shareholder (transferor), exchanges stock ina corporation, which isa party to the serger or consoldation, solely forthe stack of another corporation also a party tothe ‘merger or consolidation, or (© A security holder (transferor), of a corporation, which is a pany to the merger or consolidation, exchanges Ais securities in such corporation, solely for stock® oF securities in anather corporation, & party tothe merger oF consolidation; oF OR (2) A person (transferor), transfers his propery toa corporation ia exchange for stock® or unit of participation in such @ comporation of which, as a result of such exchange said person, alone, or together with others, not exceeding four (4) persons’, guns contol of Said corporation (Sec. 40 (C) (2), NIRC). ‘Tax Consequences: (0) The Trnsfror shall NOT cesogyze. sain. orl (i, no CGT, wo 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 same as the basis of the stock, propery, or securities transferred (substituted basis. Example: ‘Marian bought 100 shares of X Corporation at PS per share. Later X Corpration decided to ‘merge with Y Corporation. Pursuant to which Marian exchanged her 100 shares of X (Corporation for $00 shares of ¥ Corporation which had a FMV at that time of P7 per share. (@) What is the gain of Marian? Fair market value of Y sbares received (P7 x 500 shares) | Pr 3,500 Less: Bass in X shares transfered {P5 x 100 shares) (00) Gain | Pu ‘However, this gnin wil not be and therefore is not taxable. Wether wong oF 900-786, {Whether voting or nono {Wether voting or oo-vting. *Votine 1 The deter persons must alo be tas of " However, ifthe properties raster by the arse ted it hutinee orl fo leo fo ose, the tar shal be ue to VAT (equvalet 0 aie 5October 2019 (©) What will the basis of the Y shares of Marian? ‘The basis ofthe Y shares wil be the same bassin her X shares = Plshare x 500 shares = P00, (©) If Maran sells all the 500 Y shares to Ivy for ?20,000, what will be the tx consequence to Marian? Selling price of ¥ shares P 20000 Less: Basis (PI x ¥ $00 shares) 500) Gain 219,500 Since the Y share are not taded in the stock exchange and are capital assets, the P19,500 ain shall be subject to the 15% CGT. HOWEVER, If the “Transferor” receives not only stock o securities, but also ‘money or property, GAIN but NOT LOSS sball be recognized. [Note:The money andor property received is called ‘Tax Consequences: (1) Gain recognized < | Money + FMV of Property Received EXC No gain is recgaized if he transferor is a corporation and the boots disibuted inaooordance with the laa of merger o consciation (@) Basis ofthe shares received by the transferor shall be computed as follows: Formal Cost basi) ofthe stack or property ans max Less: (@) Money received ? wox OEM of ropes received mom _ (oa) Pee [AdB: (@)Guinrosomired onthe exchange Pe (©) Amous sete as cividend xox eo Basis (Com) ofthe sock received fun ‘Example: In the previous example. pursuant toa merger Marian evchanged her 100 X share for 500 Y shares (MV £7 per share) plus land (FMV = ',000) plus #2,000. (@) How much gain shall Marian recognize? 77,000‘October 2019 Fair market value of Y shares received (P7 x 500 shares) P 3,500 Plus; Boot: Land 5,000 Cash 2.000 7,000. 10,500 Less: Bassin X shares rarfered (5 x 100 shares) 1500), Gain P __ 10,000 ‘But, Gain to be recognized shall not exceed the boot received in the amount of 7,900 () What wil the bass ofthe Y shares of Marian? PS00 Cost (basis) ofthe X shares transfered Less: (a) Money received P2000 (b) FMV of land received 5,000 Balance ‘Add’ Gain recognized onthe exchange Basis (Cost) ofthe Y shares received (©) What is the basis ofthe land received in the hands of Marian? S,000