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Lecture on Dealings in Property

La Consolacion University Philippines

College of Business, Entrepreneurship and Accountancy

Income taxation Handout on Dealings in Property

Instructor: Mr. Leomar B. Seminiano, MICB, CPA

GENERAL FORMULA: Selling Price – Cost of Property = Gain or Loss

1. Where, Selling Price equals to the total consideration received or Fair Market Value or the property in
case disposed through exchange.

2. Where, Cost is equal to the acquisition cost if purchased or acquired on or after March 1, 1913;
a. If acquired through inheritance, the cost is equal to the FMV on the date of transfer;
b. If acquired through donation or gift, the cost is the same as if it would be in the hands of the donor
or the last preceding owner by whom it was not acquired by gift, EXCEPT if such basis is greater
than the FMV at the time of gift, then for purposes of determining the LOSS, the basis shall be such
FMV;
c. If acquired by less than full and adequate consideration, the basis is the money or money’s
worth paid.

Example:
(i) A sold his land to B for P 17.00. The land, costing P20.00, was inherited by A from his father where
by the time it was inherited, the FMV of such land amounted to P 15.00.
SP = P 17.00
Cost = P 15.00 (FMV at the time inherited)
Gain = P 2.00

(ii) Assume A acquired the land, costing to C P20.00, through gift from C, his grandfather. At the time
of gift, the FMV of such land is P21.00.
SP = P 17.00
Cost = P 20.00 (Cost to C)
Loss = P 3.00

(iii) Assume A acquired the land through gift from C, his grandfather. C also acquired such land by
donation from D. D acquired the land through purchase at P16.00. At the time it was received by C
from D, the land was valued at P20.00. At the time of donation from C to A, the FMV of such land
is P21.00.
SP= P17.00
Cost= P 16.00 (Cost to D who acquired the land through purchase)
Gain= P1.00

(iv) Assume A acquired the land through gift from C, his grandfather. C also acquired such land by
donation from D. D acquired the land through purchase at P21.00. At the time it was received by C
from D, the land was valued at P17.00. At the time of donation from C to A, the FMV of such land
is P19.00. A sold such land for P17.00 to B.
SP= P17.00
Cost= P21.00 (Cost to D who acquired the land through purchase)
Loss= P 4.00 (not to be recognized since it would only impose lesser tax)

SP= P17.00
Cost= P 19.00 (FMV at the time donated to A by C)
Loss= P 2.00 (Loss to be recognized, the lower amount)

(v) Assume A acquired the land through gift from C, his grandfather. C also acquired such land by
donation from D. D acquired the land through purchase at P19.00. At the time it was received by C
from D, the land was valued at P17.00. At the time of donation from C to A, the FMV of such land
is P23.00. A sold such land for P17.00 to B.
SP= P17.00
Cost= P19.00 (Cost to D who acquired the land through purchase)
Loss= P 2.00 (Loss to be recognized, the lower amount)
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Lecture on Dealings in Property

SP= P17.00
Cost= P23.00 (FMV at the time donated to A by C)
Loss= P 6.00 (not to be recognized since it would only impose lesser tax)

(vi) A sold his car for P25.00 to B. The car was acquired 2 years ago from S, his friend. The car was
valued at P21.50 on the date of acquisition. However, A was able to convince S to buy the car for
only P16.00.
SP= P25.00
Cost= P16.00 (The amount paid by A to S)
Gain= P9.00

Properties are classified into:

Ordinary Assets Capital Assets
a. Inventories, stocks in trade held by
dealers, other property or in kind
included in inventory of the taxpayer a. Other than those enumerated as ordinary assets
(e.g. work in process inventory and
finished goods inventory, stocks) b. All properties not used in business

b. Property held for sale to customers in c. investment whether or not connected with taxpayers trade
the ordinary course of business (real are capital assets (e.g. investment in equity securities and
estate developer) investment in subsidiary)

c. Properties used in business which d. Residential house and lot

is subject to depreciation or
amortization (factory, office building,
patents)
d. Real property used in business (land
which the factory stands)
NOTE:
1. Gains and losses derived from sale or
exchange of these properties are
ORDINARY GAINS and LOSSES
which are included in determining
ordinary income subject to tax.
2. Gains/Losses shall be part of
GROSS INCOME of such seller (as
other income) subject to Normal Tax.
e. Family car
f. Receivables arising from sale of inventory
Subject to CGT Subject to Normal Tax
a. Sale of stocks not listed
and not traded in local stock
exchange (5% for first
P100,000- 10% in excess of a. Other than those listed as
P100,000 capital gains if Major Capital Assets (stocks not
RFC/NRFC) if individual or DC – traded and listed, and real
15% X Net gain properties subject to 6% CGT),
all other capital gains are
subject to normal tax (added in
b. Sale of real capital the gross income)
properties NOT used in
business (6% CGT based on
FMV or SP, whichever is higher).
b. HOLDING PERIOD is
c. NO HOLDING PERIOD since applicable ONLY to individual
the capital gains tax is a final tax taxpayers
on the date of sale.

c. NO HOLDING period for

d. GAINS or LOSSES are no
longer reportable since the sale
was already subjected to final
CGT.
corporations.
d. Gains are reportable in full
subject to holding period
clause.
e. Losses are reportable only
to the extent of CAPITAL
GAINS.

NOTE: ALL ordinary gains are ADDED to the GROSS INCOME and all ordinary losses are deducted from the
gross income, ordinary gains and/or capital gains. HOWEVER, capital losses are ONLY deducted from CAPITAL
GAINS. No capital losses exceeding capital gains may be deducted from ordinary gains nor gross income.

Selling price means net selling price: (SP or FMV) – Expenses of sale or exchange

HOLDING PERIOD is applicable ONLY to individual taxpayers.

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Lecture on Dealings in Property

a. Capital assets held for not exceeding 12 months, the taxable gain or deductible loss is 50% of such
gain or loss.
b. Capital assets held for more than 12 months, capital gains taxable in full, however, in case of capital
loss deductible in full, but limited only to the extent of capital gains.
c. In case of net capital loss, such loss shall be carried over to the succeeding year.

Net Capital Loss Carry-Over (NCLCO)

 The net capital loss of one year may be carried over to the succeeding year, but not exceeding the
taxable income of the year when such net capital loss was sustained.
Example:
Mr. N, a citizen of the Philippines, single had the following data:
2010 2011
Net income from business P 80,000 P 90,000
Interest from notes of clients 4,000 2,000
Capital gain on shares of foreign
corporation held for 3 years 50,000
Capital gains on jewelry held for 10 months 70,000
Capital loss on bonds, held for 4 months 120,000

Solution:
2010 2011
Net Income from Business P 80,000 P 90,000
Interest income 4,000 2,000
Ordinary net income 84,000 92,000
Capital Gain (50%) P 25,000
Capital Gain (100%) P70,000
Capital Loss (100%) (120,000)
Net Capital Loss ( 95,000)
NCLCO (34,000)
Net Capital Gain 36,000
Total 128,000
Less: Basic personal exemption (50,000) (50,000)
Taxable Income 34,000 78,000

 Corporate taxpayers are not subject to holding period, thus cannot carry-over its net capital loss.

INSTALLMENT REPORTING

When a deferred payment is of sale of an ordinary asset, or of a capital asset which is not subject to capital gain
tax, the gross profit or gain from the sale may be reported on the installment method, IF such sale is by:
a. One who is a dealer in personal property regularly selling on installments; or
b. One who makes a casual sale or disposition of personal property (other than inventory) for a selling price
in excess of one thousand pesos (P1,000.00) and with initial payments not exceeding 25% of the selling
price; or
c. One who makes a sale of real property, with initial payments not exceeding 25% of the selling price.

Without Mortgage
IP= DP + Payments received this
year
IP ÷ SP = 25% or less (allowed
for Installment Reporting)
With Mortgage but no Excess
over the Cost
IP= DP + Payments received this
year
IP ÷ SP = 25% or less (allowed for
Installment Reporting)
With Mortgage in excess over
the Cost
IP= DP + Payments received this year
plus Excess of Mortgage over the Cost
IP ÷ SP = 25% or less (allowed for IR)

GP ÷ CP x total collections = GP ÷ CP x total collections = GP ÷ CP x total collections = Income

Income Realized Income Realized Realized
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Lecture on Dealings in Property

IP= Initial payments, payments of

the buyer to seller, whatever form
(cash, properties, cancellation of
indebtedness, etc.) which is
received during the year. It is not
similar to down payment.
In this case, the contract price is equal
In this case, the contract price is to the selling price minus mortgage
equal to selling price minus assumed by the buyer plus excess of
DP= Downpayment mortgage assumed by the buyer. mortgage over cost.
SP= Selling price
GP= Gross Profit
CP= Contract Price

In this case, the selling price is

the contract price.

CAPITAL GAIN TAX EXEMPTION: Requirements

a. The capital asset sold was a principal residence;
b. The taxpayer is a citizen of the Philippines or resident alien;
c. The proceeds of the sale was invested in acquiring a new principal residence;
d. Notice to make such utilization was given to the BIR within 30 days from the date of sale;
e. Utilization of the proceeds of the sale was made within eighteen (18) months from the date of sale;
f. A cash deposit is made with an accredited bank for an amount equal to the capital gain tax, and answerable
for the capital gain tax should the conditions for the exemption be not satisfied;
g. The exemption shall be availed of once only every ten years.

 If the entire proceeds of the sale is invested, the entire capital gain is exempt. The cost basis of the
new principal residence will be the basis of the old residence.

 If only a portion of the proceeds of the sale is invested in the new residence,
Exemption on Capital gain tax:
Proceeds of the sale not invested x what should have been
Entire proceeds of the sale the tax (CGT)
Basis of the new principal Residence:
Proceeds of the sale invested x Basis of the old Residence
Entire proceeds of the sale

 If the amount invested is in excess of the proceeds of the sale, the capital gain is exempt and the basis
for the new principal residence is equal to the basis of the old residence plus the additional investment
( New Residence = Old residence + additional capital investment)