---- active use of the property changed its character previously

established as a business property.

Summary

Capital Assets Ordinary Assets

Not part of the inventory Part of the inventory AUTOMATIC CONVERSION APPLICABLE TO TAXPAYERS NOT
No ordinarily held for sale Ordinarily held for sale ENGAGED IN REALTY BUSINESS
Without depreciation With depreciation
Properties classified as ordinary assets for being used in business
Not used in business Used in Business
are automatically converted into capital assets upon showing of
proof that the same have not been used in business for more than
two (2) years prior to the consummation of the taxable
Types of Taxpayers
transactions involving said properties.
Engaged in Real Estate Not Engaged in Real Estate
Business Business
1. Dealers 1. Not a dealer Effect of Transfer of Properties by Dealers
2. Developers 2. Not a developer
3. Lessors 3. Not a lessor 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
Rules in Determining Classification of Assets hands of the buyer/transferee shall be determined in accordance
with the following rules:
TAXPAYER ENGAGED IN THE REAL ESTATE BUSINESS ORDINARY
ASSETS Mode of Transfer by a Transferee is Transferee is
person engaged in realty NOT engaged engaged in realty
1. All real properties acquired by the real estate dealer. business in realty business or not
2. All real properties acquired by the real estate developer business AND engaged in realty
whether developed or underdeveloped as of the time of does not use business but
acquisition. the property uses the
3. All real properties of the real estate lessor, whether land, in business property in
building, and/or improvements, which are for lease/rent or business
being offered for lease/rent or otherwise for use or being 1. Succession Capital Asset Ordinary Asset
used in the trade or business. 2. Donation Capital Asset Ordinary Asset
4. All real properties acquired in the course of trade or business 3. Dividends Capital Asset Ordinary Asset
by a taxpayer *habitually engaged in the sale of real property
4. Tax-free exchange Capital Asset Ordinary Asset
shall be considered as ordinary assets.

Taxpayers who changed its real estate business Ordinary

Involuntary Transfers (Expropriations/Foreclosures)
to a non-real estate business. Asset
Taxpayers who originally registered to be Property is NOT used in
Ordinary Capital Asset
engaged in the real estate business but failed to business
Asset
subsequently operate. Property is used in business Ordinary Asset
Bank acquired properties (through foreclose
sales) Ordinary
Note: Banks are NOT considered as habitually Asset
engaged in the real estate business.
In the case of taxpayer not engaged in the real Rules in Determining Gains or Loss PART 2
estate business, real properties, whether land,
Ordinary
building, or other improvements, which are used
Asset
or being or have been previously used in trade
or business of the taxpayer. Determination of Amount and Recognition of Gain or Loss

ORIDNARY ASSET CAPITAL ASSET

Notes: Selling Price Xx Selling Price
Xxx
x
Meaning of Habitually Engaged in Trade: Cost (Basis of Xx Cost (Basis of
Xxx
Property) x Property)
- Registered with the Human Settlements Adjudication Ordinary gain (loss) Xx Capital gain (loss)
Xxx
Commission (formerly HLURB or HUDCC) as a real estate x
dealer or developer.
- Consummation during the preceding year of at least six (6)
taxable real estate sale transactions, regardless of amount. Definitions
- A property purchased for future use in the business, even
though this purpose is later thwarted by circumstances The amount realized from the sale or other
beyond the taxpayer’s control, does not lose its character as disposition of property shall be the sum fair
Selling Price
an ordinary asset. Nor does a mere discontinuance of the market value of the property (other than
money) received.
 1. If property was purchased – the cost is
the acquisition cost.
2. If property was inherited – the cost is Distinctions
the FMV as of the date of acquisition Unlisted Object of Sale Listed
(succession). Net Capital Gain Tax Basis Gross Selling Price
3. If property was acquired by 15% Tax Rate 6/10 of 1%
gift/donation – the cost shall be the Final Tax Tax to be Imposed Percentage Tax
same as if it would be in the hands of Local Stock
BIR RDO Venue of Process
the donor (FMV at the time of Exchange
donation) OR the last preceding owner
Cost (Basis of by whom it was not acquired by gift (i.e.
Property) purchased), except that if such basis is Unlisted Shares of Stocks – Seller is Individual or Non-Individual
greater than the fair market value of
the property at the time of the gift Capital gains tax – Final tax rate of 15% for net capital gains
then, for purposes of determining loss, realized during the taxable year from the sale, barter, exchange or
the basis shall be such fair market other disposition on shares of stock in a domestic corporation not
value. traded through the stock exchange.
4. I property was acquired for less than an
Formula:
adequate consideration in money or
Selling Price Xxx
money’s worth – the cost is the amount
Cost Xxx
paid by the transferee for the property
Net Capital Gain Xxx
(acquisition cost).
CGT rate 15%
Excess of the amount realized therefrom over
Capital gains tax Xxx
Gain the basis or adjusted basis for determining
gain.
Excess of the basis or adjusted basis for
Loss Notes:
determining loss over the amount realized.
The excess of selling price over cost (basis of  Rate applies ALL taxpayers including NRANETB and NRFC.
Capital gain
property).  If Net Capital Loss, no CGT is imposable hence exempt.
The excess of cost (basis of property) over  Gains on sale of shares of stocks issued by a foreign
Capital loss
selling price. corporation are treated as ordinary income subject to
Net capital The excess of capital loss over capital gain. regular tax. Foreign tax payment is treated as credit or
gain expense at option of taxpayer.
Net capital Capital losses shall be allowed only to the  The Adjusted Net Asset Method in computing net capital
loss extent of capital gains. gain no longer applies.
Limitation on Capital losses shall be allowed only to the
deduction of extent of capital gains.
capital losses Definitions
Net capital loss is carried over to the
succeeding year and shall be deemed as a 1. In the case of cash sale, the selling price
Net Capital short-term loss i.e. as if held for not more shall be the total consideration per deed of
Loss Carry than 12 months. sale.
Over 2. If the total consideration of the sale or
Amount to be carried over is up the extent of disposition consists partly in money and
Selling
capital gain. partly in kind, the selling price shall be sum
Price
of money and the fair market value of the
property received.
Rules on Holding Period 3. In the case of exchange, the selling price
shall be the fair market value of the
Rule on Holding Period Individual Non-Individual property received.
Taxpayers Taxpayers Cost 1. If property was purchased – the cost is the
a. Short-term capital gain (Basis of acquisition cost.
or loss (capital asset Property 2. If property was inherited – the cost is the
100% 100%
has been held for not ) FMV as of the date of acquisition
more than 12 months) (succession).
b. Long-term capital gain 3. If property was acquired by gift/donation –
or loss (capital asset the cost shall be the same as if it would be
50% 100%
has been held for more in the hands of the donor (FMV at the time
than 12 months) of donation) OR the last preceding owner by
whom it was not acquired by gift (i.e.
purchased), except that if such basis is
greater than the fair market value of the
property at the time of the gift then, for
Sale of Shares of Stocks Not Listed in Stock Exchange purposes of determining loss, the basis shall
PART 5 be such fair market value.
4. I property was acquired for less than an
 adequate consideration in money or
money’s worth – the cost is the amount paid
by the transferee for the property
(acquisition cost).
Exempt Transactions
The following are NOT subjected to CGT:
1. Dealer in securities, regularly engaged in the buying and
selling of securities.
2. An entity exempt from the payment of income tax under
existing investment incentives and other special laws.
3. An individual or non-individual exchanging real property
solely for shares of stocks resulting in corporate control.
Documentary Stamp Tax (almost equivalent to 1.5%)
(a) When the consideration, or value received or contracted to
be paid for such realty after making proper allowance of any
encumbrance does not exceed One thousand pesos (Php
1,000), Fifteen pesos (Php 15.00)
(b) For each additional One thousand pesos (P1,000) or
fractional part thereof in excess of One thousand pesos
(P1,000) of such consideration or value, Fifteen pesos
(P15.00)
Illustration

In 2018, Goyo purchased a house and lot in the amount of

Discussion Question – Determination of Venue
Php2,500,000.00. The market value of the house and lot with an
Nicanor’s business is registered in Pampanga. He is employed in area of 100 square meters from the records of the Assessor are
Makati City. He owns unlisted shares of stocks of ABC Corp. whose Php 1,000,000.00 and Php 1,000,000.00, respectively. The zonal
principal place of business is in Mandaluyong City. He sold the value of the property is Php 50,000 per square meter. Goyo sold
shares to Inday who is registered in Caloocan City. Where should the same property in 2019 in the amount of Php 4,000,000.00.
the CGT return be filed? Compute the 2019 CGT/CWT and DST if the property is capital and
ordinary asset:
 Pampanga
 Makati Sale of real property Sale of real property
 Mandaluyong classified as capital asset classified as ordinary asset
 Caloocan City Gross Selling Gross Selling
4 Million 4 Million
Price Price
Assessed Assessed
Value Value
2 Million 2 Million
House (1M) House (1M)
Lot (1M) Lot (1M)
Sale of Real Property Classified As Capital Asset PART 6 Zonal Value Zonal Value
House (5M) 6 Million House (5M) 6 Million
Lot (1M) Lot (1M)
Rules on Sale of Real Property CGT Php 360,000 CWT Php 360,000
DST Php 90,000 DST Php 90,000
Distinctions
Capital Asset Object of Sale Ordinary Asset
GSP, ZV, AV Tax Basis GSP, ZV, AV Taxation if buyer is the government
6% or
6% or 0%* Tax Rate The individual taxpayer has an option to report the transaction as:
0%/1.5%/3%/5%
Final Tax Nature of Tax Creditable Tax 1. Capital gains tax (CGT), or
Form 2. Under normal income tax

If the buyer is:

Sale of Real Property Classified as Capital Asset
1. Government
Capital gains tax - 6% 2. Political subdivision
3. Government agency or instrumentality
The value of the real property will be based on the selling price, 4. Government-owned or controlled corporation.
market value as determined by the Commissioner (Zonal value) or
the fair market value as shown in the schedule of values of the Note: No similar option if seller is non-individual taxpayer
Provincial or City Assessor, whichever is higher.

If there is no zonal value, the taxable base is whichever is higher of

the gross selling price per sales documents or the fair market
value that appears in the latest tax declaration.
If there is an improvement (house or building), the FMV per latest
tax declaration at the time of the sale or disposition, duly certified
by the City/Municipal Assessor shall be used.
Illustration
In 2018, Goyo purchased a house and lot in the amount of
Php2,500,000.00. The market value of the house and lot with an
area of 100 square meters from the records of the Assessor are
Php 1,000,000.00 and Php 1,000,000.00, respectively. The zonal
value of the property is Php 50,000 per square meter. The
property was expropriated by the Municipal government of
Macababy in 2019 in the amount of Php 4,000,000.00. Goyo spent
Php 500,000.00 for accountants and lawyers’ fees, transportation, Answer: Php 0. Asset is an ordinary asset hence not subject to
representation expenses and notarial fees. Compute the tax CGT.
savings if Goyo will opt for normal tax.
2. How much is the creditable withholding tax?
Capital Gains Tax Normal Income Tax
Gross Selling P 4,000,000 Gross Selling P 4,000,000 Answer: Php 360,000 (highest Php 6M x 6%)
Price Price
3. Assuming asset is a capital asset, how much is the capital
Assessed P 2,000,000 Less: Cost 2,500,000
gains tax?
Value
Zonal Value P 6,000,000 Gross P 1,500,000 Answer: Php 360,000 (highest Php 6M x 6%)
income
Less: 500,000
Expenses
Taxable P 1,000,000 Discussion Question – Determination of Venue
Income
Nicanor’s business is registered in Pampanga. He is employed in
CGT P 360,000 Income Tax P 190,000
Makati City. He lives in Mandaluyong City. He sold his house and
Due
lot located in Caloocan City. The deed of sale was notarized in
(graduated
Taguig City. Where should the CGT return be filed?
tax)
Savings if Gyo will opt for normal tax – Php 170,000. Pampanga
DST P 60,000 P 60,000 Makati City
Note: If buyer is government, the DST is based on consideration. If Mandaluyong City
other party is exempt, the party NOT exempted is the one liable. Caloocan City
Taguig City

Sale of Real Property as Ordinary Asset

If object of sale is ordinary asset, the transaction is subject to Sale of Principal Residence PART 7
creditable withholding tax based on the following rate: Base is
GSP/ZV/AV whichever is higher.

Tax Rate Description of Status of Seller Sale of Principal Residence

 Seller is registered with HLURB or HUDCC
as engaged in socialized housing project.
 Selling price of the house and lot or only
0%
the lot does not exceed P 450,000 or if lot
only does not exceed P 180,000 (40% of P
450,000)
 Nort engaged in socialized housing but is
engaged in buying/selling real properties
1.5%
(realtor)
 Selling price is not over P 500,000.
 Not engaged in socialized housing but is
engaged in buying/selling real properties
3% (realtor)
 Selling price is over P 500,000 not over P 2
Million.
 Not engaged in socialized housing but is
engaged in buying/selling real properties
5%
(realtor)
 Selling price is over P 2 Million.
 Not engaged in socialized housing and
6% NOT engaged in buying/selling real
properties.
General rule: Exempt from capital gains tax
Exception: Taxable if the requisites are not complied with
Note: Sale of principal residence is still subject to DST
REQUIREMENTS FOR EXEMPTION OF CAPITAL GAINS TAX ON
SALE OF PRINCIPAL RESIDENCE.
 Full utilization of proceeds within eighteen (18) calendar
months from the date of sale or disposition
 The historical cost or adjusted basis of the real property sold
or disposed will be carried over to the new principal
residence built or acquired.
 The Commissioner has been dully notified, through a
prescribed return, within thirty (30) days from the date of
sale or disposition of the person’s intention to avail of the tax
exemption.
 Exemption was availed only once every ten (10) years.
 In case there is no full utilization of the proceeds of sale or
disposition – The portion of the gain presumed to have been
realized from the sale or disposition will be subject to Capital
Gains Tax.

Seller is NOT Habitually Engaged in Real Estate

Formula:
ABC Corp., a manufacturing company, sold a real property used in
business amounting to Php 6,000,000. Zonal and fair value by Memorize:
assessor is Php 5,000,000 and Php 3,000,000, respectively.
GSP or FMV of
Discussion Questions: Unutilized portion CGT rate
x old whichever is x
of GSP of OLD PR (6%)
higher
1. How much is the capital gains tax?
 market value of Php 5,000,000.00 (zonal is higher than assessed)
for a consideration of Php 4,000,000.00. Within the 18-month
reglementary period, he purchased his new principal residence at
a cost of Php 3,00,000.00.

Historical cost of old principal

Process in a Nutshell 1,000,00
residence
Gross selling price 4,000,000
Bring the Submission of
Release of e- FMV of old principal
documents to _ Post Reporting 5,000,000
CAR residence
the RDO Requirement
Cost to acquire new principal
| | | 3,000,000
residence
Opening of
Officer of the Escrow
Report of RO
Day RO/GS Deposit with Answer:
the Bank
| | | GSP or FMV of
Submit Execution of Unutilized portion CGT rate
Release of x old whichever is x
Documents for _ Escrow of GSP of OLD PR (6%)
Escrow higher
evaluation Agreement

CGT IS
4,000,000−3,000,000 =75,00
x 5,000,000 x 6%
0
Scenario 1 – Full utilization of proceeds from the sale 4,000,000
Nicanor acquired his principal residence in 2009 at a cost of Php
1,000,000.00. He sold the property on January 1, 2018 with a fair
Notes:
market value of Php 5,000,000.00 (zonal is higher than assessed)
for a consideration of Php 4,000,000.00. Within the 18-month In this case, Nicanor is exempt from the CGT to the extent
reglementary period, he purchased his new principal residence at allocable to that portion which he actually utilized to acquire his
a cost of Php 7,000,000.00. NEW principal residence.
Historical cost of old principal Since the proceeds was not entirely utilized to acquire NEW
1,000,000
residence principal residence shall be equivalent to the proportion of the
Gross selling price 4,000,000 amount over the GSP applied on the historical cost as follows:
FMV of old principal
5,000,000
residence
Cost to acquire new principal
7,000,000
residence Historical cost of old principal
1,000,000
residence
Less: portion of historical cost
Compute the capital gains tax: pertaining to the tax paid for
the unutilized amt.
Compute the Adjusted Cost Basis of New Principal Residence: (1,000,000 unutilized / 4,000,000
GSP)(1M/4M = 25% x 1,000,000)
250,000
The historical cost or the adjusted cost basis of the OLD principal Adjusted cost basis of NEW
residence which shall be carried over to the cost basis of the NEW 750,000
Principal Residence
principal residence is as follows:

Historical cost of Exempt Transactions

1,000,000
OLD
Add: Additional The following transactions are NOT subject to CGT:
cost to acquire
NEW: 1. A government entity or government-owned or controlled
Cost to acquire corporation selling real property.
7,000,000
NEW 2. If the disposition of the real property is gratuitous in nature.
Less: GSP of OLD 4,000,000 3,000,000 3. Where the deposition is pursuant to the Comprehensive
ADJUSTED COST Agrarian Reform Program (CARP) law.
4,000,000
BASIS OF NEW PR

Electronic-Certificate Authorizing Registration (e-CAR)

Scenario 2 – Partial utilization of proceeds from the sale. Is a certification issued by the Commissioner of his duly authorized
representative attesting that the transfer has been reported and
Nicanor acquired his principal residence in 2009 at a cost of Php the taxes have been fully paid.
1,000,000.00. He sold the property on January 1, 2018 with a fair
e-CAR are issued on One-Time Transactions (ONETT). ONETT
include the following:

1. Sale of Real Property Classified as Capital Asset (CGT)

2. Sale of Real Property Classified as Ordinary Asset (CWT)
3. Sale of Shares of Stocks Not Listed (CGT)
4. Transfer by way of Donation (Donor’s Tax)
5. Transfer by way of Inheritance (Estate Tax)

Note: Validity of e-CAR-Five (5) years from the date of issuance.

Administrative Requirements

Admin.
Person Place of
Requiremen Form Deadline
Liable Filing
ts
Sale of
Shares of
Where is
Stocks not G.R.
1707 seller is
listed in Seller
(v2021) registere 30 days
Stock Exc. Buyer
d after sale
Exchange
or
(CGT)
dispositio
Sale of Real
Where n
Property 1706 G.R.
property
Classified as (v2018 Seller
is
Capital *) Exc. Buyer
located
Asset (CGT)
10th day
Sale of Real
Where following
Property 1606 G.R.
property the
Classified as (v2018 Seller
is month of
Ordinary *) Exc. Buyer
located transactio
Asset (CWT)
n
5th day
By
following
2000- agreemen Where
Documentar the
OT t. If no the CGT
y stamp tax month of
(v2018) agreemen is paid
sale
t, buyer
(notary)