Before we discuss the answers to the problem, let us first discuss the foundation needed

to address the question. We must differentiate an ordinary asset from a capital asset. According
to Aguilla (2011), the tax treatment of either ordinary asset and capital asset differ slightly, and
as such, they must first be determined. To easily show the attributes of each type of asset, refer to
the following table:
Attributes of ordinary asset Attributes of capital assets
Stock included in inventory Personal or non-business property
Property primarily held for sale Asset held merely for investment
Property used in business which is capitalized Property not used in business
Real property used in trade, business, or
profession of the taxpayer

Upon determining what sort of asset, they are, we can now discuss how they will be
taxed. As for ordinary assets, 100% of gains are taxed at the appropriate rate and included in the
Income Tax Return. As for the losses, it is 100% deductible in the Income Tax Return if the
taxpayer chooses to itemize it as a deduction. As for capital assets, gains and losses are similarly
fully recognized, however, only the net capital gain is included in the income tax return.
Moreover, for capital assets, the type of taxpayer must also be identified as it changes how much
net capital gain is recognized. If the taxpayer is an individual, the duration of the asset must first
be identified. If it was held for less than or equal to one year (short term), 100% of the net capital
gain is recognized. If it was held for more than one year (long term), only 50% of the net capital
gain is recognized. On the other hand, if the taxpayer is a corporation, the net capital gain is
always 100% recognized regardless if it is short term or long term. To further ease the
understanding of this, refer to the summary in the following tables:
Ordinary assets
Gains: 100% included in the ITR Losses: 100% deductible in ITR

Capital assets
If taxpayer individual: If taxpayer corporation:
Short term: (equivalent to one year or less) Short term: (equivalent to one year or less)
100% net capital gains recognized 100% net capital gains recognized
Long term: (More than one year) Long term: (More than one year)
50% net capital gains recognized 100% net capital gains recognized

Now that we can differentiate between ordinary assets and capital assets, we can now answer the
problems.
Explanation for numbers 1 and 2
- Land A purchased at fair value of 3.25M. But it was recorded in the books only at 3M.
Since tax is cash basis, it is assumed that it was purchased at 3M rather than 3.25M since
you only adjust PPE for accumulated depreciation and impairment. Land is not
 depreciated and there was no mention of impairment, therefore, the amount of 3M was
the purchase price.
- The sale of Land A is considered as ordinary gain as it should be categorized as property
primarily held for sale. This is further supported by how it was held for a short amount of
time and there were no intended developments meant for the property.
- The same applies for Land B in terms of its purchase price. Despite it being mentioned
that it was purchased at FV, its purchase price is still what was recorded which was 3.2M.
- The sale of Land B is considered as ordinary gain as well despite there being an intention
to develop the property. This is because the building placed on it was used for business
which therefore also makes the land an ordinary asset.
- Building A was built on Land B and since the building itself was used as a production
plant of the entity, it is considered an ordinary asset. The gain is therefore an ordinary
gain.
- Building B was built on a leased land and was only used for three years. It was then idle
for five years meaning that it was initially considered as an ordinary asset. However,
since it was left idle, it is no longer used in business operations turning it into a capital
asset. Moreover, it is important to note how long the asset was left idle. If the case
specifically mentions that it was owned by an individual, it will recognize only 50% of
the gain or loss for tax purposes if it was idle for more than 1 year. However, since it was
mentioned to be a corporation, it is always at 100% regardless of whether it was for a
period of less than or more than 1 year.

Explanation for number 3

Under the new amendments of R.A. No. 10963 or the Train Law, the applicable tax rate for
Capital Gains Tax (CGT) is pegged at 6% for real properties located in the Philippines and held
as capital assets (Bureau of Internal Revenue, 2021). Moreover, the 6% capital gains tax rate is
then multiplied to the higher between the gross selling price or fair market value of the real
property (Pagaspas, 2021). Therefore, computation for Capital Gains Tax only applies to capital
assets since the tax for ordinary assets should reflect in the Income Tax Return instead due to
how they are used in business operations. For this case specifically, only Building B classified as
a capital asset. Since its fair market value is higher than its selling price, it would be the amount
to be used in the computation.

Explanation for number 4

As mentioned in the tax code, the filing for Capital Gains Tax shall be accomplished 30 days
after the sale of an asset ((Bureau of Internal Revenue, 2021). Since the asset was paid for in a
down payment fashion, each individual down payment will correspond to its own individual
deadline. Moreover, the deadline will be determined simply by adding an additional 30 days on
the day each down payment was made. However, the deadline of 30 days has limitations which
would be explored further in question number 5.
Explanation for number 5
Section 6.1 of the Revenue Regulations No. 4-2008 of the BIR states that “For real estate sale
transactions of large taxpayers on “cash basis” or “deferred-payment sale not on installment
plan” basis, (i.e., payments in the year of sale exceed 25% of the selling price) where the capital
gains tax or expanded withholding tax as well as documentary stamp tax returns have already
been filed with and taxes due thereon, if any, have already been paid to the RDO where the real
property is located, the corresponding TCL/CAR shall remain to be processed and issued by said
RDO even upon the issuance of these Regulations; (Bureau of Internal Revenue, 2008).” To
simplify it and apply it more to the case at hand, if the first down payment made regarding the
sale of a property exceeded 25% of the selling price, the purchaser must fully pay the capital
gains tax within 30 days of the date of sale. It is important to highlight that this rule only applies
to the first down payment as it is the deciding factor of whether or not the installment method
will be applied to the capital gains tax. Regardless of which method is applied, the total amount
of capital gains tax paid is still equal and therefore falls to the purchaser to decide which method
they prefer. This is further supported by how the filling of capital gains tax form is voluntary by
nature and it is within their prerogative to file in the manner they would so choose.
References

Aguila M. (2011). Capital or ordinary: a realtor’s dilemma. Retrieved from

https://www.philstar.com/business/2011/07/26/709597/capital-or-ordinary-realtors-dilemma

Bureau of Internal Revenue (2021). Capital Gains Tax. Retrieved from

https://www.bir.gov.ph/index.php/tax-information/capital-gains-tax.html

Bureau of Internal Revenue (2008). Revenue Regulations No. 4-2008. Retrieved from
https://www.bir.gov.ph/images/bir_files/assessment_performance_and_monitoring_1/rr%20no.
%204-2008.pdf

Pagaspas G. (2021). Overview of Capital Gains Tax in the Philippines. Retrieved from
https://taxacctgcenter.ph/overview-of-capital-gains-tax-in-the-philippines/#:~:text=In
%20computing%20the%20capital%20gains,gains%20tax%20in%20the%20Philippines