INCOME TAXATION

GAINS IN DEALINGS IN PROPERTIES – INSTALLMENT REPORTING AND

PAYMENT (CAPITAL vs ORDINARY GAINS)
CHAPTER VIII - ACCOUNTING (C) Sales of Real Property Considered
PERIODS AND METHODS OF as Capital Asset by Individuals. –
ACCOUNTING An individual who sells or disposes
Section 49. Installment Basis. – of real property, considered as
(A) Sales of Dealers in Personal capital asset, and is otherwise
Property. – Under rules and qualified to report the gain
regulations prescribed by the therefrom under Subsection (B)
Secretary of Finance, upon may pay the capital gains tax in
recommendation of the installments under rules and
Commissioner, a person who regulations to be promulgated by
regularly sells or otherwise the Secretary of Finance, upon
disposes of personal property on recommendation of the
the installment plan may return as Commissioner.
income therefrom in any taxable
year that proportion of the Losses are to be reported in the year of
installment payments actually incurrence. (Ordinary loss – itemized
received in that year, which the deduction, Capital loss – deducted to the
gross profit realized or to be extent of capital gains where Net Capital
realized when payment is Gain is reports as a non-operating income)
completed, bears to the total Ordinary gains/losses are reported at
contract price. 100%.
(B) Sales of Realty and Casual Sales of Capital gains/losses are reported
Personality. – In the case (1) of a Individuals – 50% only if the
casual sale or other casual holding period of the assets > 12
disposition of personal property months and 100% if the holding
(other than property of a kind period is < 12 months.
which would properly be included
in the inventory of the taxpayer if
on hand at the close of the taxable
year), for a price exceeding One
thousand pesos (PhP1,000), or (2)
of a sale or other disposition of real
property, if in either case the initial
payments do not exceed twenty-
five percent (25%) of the selling
price, the income may, under the
rules and regulations prescribed by
the Secretary of Finance, upon
recommendation of the
Commissioner, be returned on the
basis and in the manner above
prescribed in this Section. As used
in this Section, the term ‘initial
payments’ means the payments
received in cash or property other
than evidences of indebtedness of
the purchaser during the taxable
period in which the sale or other
disposition is made.
INCOME TAXATION
GAINS IN DEALINGS IN PROPERTIES – INSTALLMENT REPORTING AND
PAYMENT (CAPITAL vs ORDINARY GAINS)
Corporations – always at 100% (no 200k/1M*800k = 160,000
holding period rule)
Case 1:
Should we take the 25% test? No.
Should we file ITR? Yes.
Tax Treatment? RIT.
Gross Profit/Gain: 1M-800k = 200k
Gains/Contract Price (CP)*Installment
received during the year:
a. Installment income (ordinary gain)
in 2020?
200k/1M*200k = 40,000
b. installment income (ordinary gain)
in 2021?
Case 2:
Should we take the 25% test? Yes.
Should we file ITR? Yes.
Tax Treatment? RIT.
Holding Period – if individual or
corporation.
Gain: 1M-800k = 200k
25% test: IP/SP = 200k/1M = 20%; yes.
Gains/Contract Price (CP)*Installment
received during the year:
a. Installment income (capital gain) in
2020?
200k/1M*200k = 40,000
b. installment income (capital gain) in
2021?
200k/1M*800k = 160,000
Continuation:
If there is a 2-year holding period for an
individual.
200k capital gain is to be reported with just
50%; 100k.
a. Installment income (capital gain) in
2020?
100k/1M*200k = 20,000
b. installment income (capital gain) in
2021?
100k/1M*800k = 80,000
If there is a 2-year holding period for a
corporation.
a. Installment income (capital gain) in
2020?
200k/1M*200k = 40,000
b. installment income (capital gain) in
2021?
200k/1M*800k = 160,000
(there is no holding period rule in
corporation so it is still 100%)
Case 3:
INCOME TAXATION
GAINS IN DEALINGS IN PROPERTIES – INSTALLMENT REPORTING AND
PAYMENT (CAPITAL vs ORDINARY GAINS)
Should we take the 25% test? Yes. d. CGT to be paid on or before
Should we file ITR? Yes.
90k/1M*400k = 36,000
Tax Treatment? RIT.
Gross Profit/Gain: 1M-800k = 200k
25% test: IP/SP = 200k/1M = 20%; yes.
Gains/Contract Price (CP)*Installment
received during the year:
a. Installment income (ordinary gain)
in 2020?
200k/1M*200k = 40,000
b. installment income (ordinary gain)
in 2021?
200k/1M*800k = 160,000
*Capital asset have holding period
but not ordinary asset.
Case 4:
CGT: 1.5M since FMW is higher; 90,000.
Should we file ITR? No.
25% test: IP/SP = 200k/1M = 20%; yes.
a. CGT to be paid on or before July
31, 2020?
90k/1M*150k = 13,500
b. CGT to be paid on or before
December 31, 2020?
90k/1M*50k = 4,500
c. CGT to be paid on or before July
31, 2021?
90k/1M*400k = 36,000
December 31, 2021?
With mortgage:
CP = SP-MP
CP= 1M-600k = 400k
Gain: 1M-800k = 200k
Should we take the 25% test? Yes.
Should we file ITR? Yes.
Tax Treatment? RIT.
25% test: IP/SP = 200k/1M = 20%
a. Installment capital gain in 2020?
200k/400k*200k = 100,000
b. Installment capital gain in 2021?
200k/400k*200k = 100,000
Assuming:
Holding period: 5 years
200k capital gain is to be reported
with just 50%; 100k
a. Installment capital gain in
2020?
100k/400k*200k = 50,000
b. Installment capital gain in
2021?
100k/400k*200k = 50,000
CP = SP-MP+XS
Because MP>Cost
Initial Price (IP) will be excess of the asset
and the initial payments.
Gain: 1M-850k = 150k
25% test:
CP = 1M-850k+50k = 200k
a. Installment capital gain in 2020?
200k/200k*110k(40k+20k+50k
excess) = 110,000
b. Installment capital gain in 2021?
INCOME TAXATION
GAINS IN DEALINGS IN PROPERTIES – INSTALLMENT REPORTING AND
PAYMENT (CAPITAL vs ORDINARY GAINS)
200k/200k*90k = 90,000

CP = 1M-2.5M = 1.5M
IP/SP = 1.5M/4M = 37.5%; not qualified
for 25% test. Thus, cannot qualified for
installment.
Capital Gain: 4M-3M = 1M
a. How much is the capital gain to
report under the deferred payment
method of reporting income in
2020?
1.5M+(2.5M*0.80)-3M = 500,000
Down payment+(Mortgage*0.80)-Cost

b. How much is the capital gain to

report under the deferred payment
method of reporting income in

2021?
2.5M*0.20 = 500,000