Dealings in Property

Dealings in property refer to the disposal of assets (ordinary assets or capital assets) either through sale
or exchanges. Under the tax code, the following are ordinary assets:

1. Stock in trade of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of taxable year.

2. Property used in trade or business subject to depreciation.

3. Real property held by the taxpayer primarily for sale to customers in the ordinary course of
trade or business.

4. Real property used in trade or business of the taxpayer

On the other hand, capital assets include all other property held by the taxpayer (whether or not
connected with his trade or business) not included in the definition of ordinary assets above.

ILLUSTRATION 1:

Classify the following as ordinary or capital assets

1) Stock and securities held by taxpayers as investment

2) Stock and securities held dealers in securities.

3) Interest in partnership and joint venture

4) Goodwill

5) Real property not used in trade or business 5

6) House and lot

7) Real property held for sale in the ordinary course of trade or business by a real estate company.

8) Real property used as a warehouse

9) Real property held as investment by a real estate company

10) Parking space for lease

Answer:
1) Capital asset
2) Ordinary asset
3) Capital asset
4) Capital asset
5) Capital asset
6) Capital asset
7) Ordinary asset
8)Ordinary asset
9) Capital asset
10) Ordinary asset

Applicable Taxes

Property classification of an asset as capital or ordinary is important because of the special tax rules on
gains and losses from sales or exchanges of capital assets which do not apply to gains and losses from
sale or exchanges of ordinary assets. Gains on sale or exchanges of capital assets and ordinary assets
may be subjected to the following types of taxes:
DISCUSS THE TABLE

ORDINARY GAIN

Subject to basic tax. Thus, it shall form part of the taxpayer's taxable income.

CAPITAL GAINS
Subject to Ordinary or Basic Income Tax

All other capital asset transactions other than assets subject to percentage taxes and capital gains taxes
may result to either capital gains or capital losses which are subject to basic tax (Refer to Table 8-1).

RULES IN THE RECOGNITION OF CAPITAL GAINS AND LOSSES

1. The transaction must involve property classified as capital asset.

2. The transaction must arise, generally, from sale or exchange.
3. Net capital gains are added to ordinary gains. However, if the result is a net capital loss, such loss
can only be deducted from the capital gain. This is to ensure that only costs or expenses incurred in
earning the Income shall be deductible for income tax purposes consonant with the requirement of the
law that only necessary expenses are allowed as deductions from gross income. The term "necessary
expenses presupposes that in order to be allowed as deduction, the expense must be business
connected, which is not the case insofar as capital losses are concerned. This is also the reason why all
non-business connected expenses like personal, living and family expenses, are not allowed as
deduction from gross income (Section 36(A)(1) of the 1997 Tax Code).

4. HOLDING PERIOD

This rule is applicable only to individual taxpayers, estates and trusts. Holding Period refers to the
length of time the asset was held by the taxpayer. It covers the period from the date of acquisition to
the date of sale or exchange. The amount of capital gains and losses will depend on the length of time
the asset was held by the Individual taxpayer as follows:

Holding Period Percentage to be recognized

12 months or less 100%
More than 12 months 50%

The entire amount of capital gains and losses incurred by corporations shall be recognized regardless
of the holding period. However, the rule that capital losses are recognized only to the extent of
capital gains shall likewise apply to corporate taxpayers.

5. Net Capital Loss Carry-over

This rule is applicable only to individual taxpayers. If an individual taxpayer sustains in any taxable
year a net capital loss, such loss shall be treated in the succeeding year as a short-term capital loss.
Meaning, it can be deducted against net capital loss in the year immediately following the year when a
net capital loss was incurred.

The amount that can be deducted from the net capital gain of the succeeding year should not be
in excess of the net income (after personal exemption) at the time the capital loss was incurred.
The foregoing rules do not apply to capital asset transactions involving real property and shares of
stock of domestic corporations as these are subject to final capital gains taxes.

Loss sustained by Domestic Banks and Trust Companies

Any loss sustained by a domestic bank or any trust company from sale of bonds, debentures, notes or
certificate or other evidences of indebtedness issued by any corporation, including those issued by the
government is considered as an ordinary loss deductible from ordinary income
Computation of Gains and Losses from Dealings in Property

Gains or losses from dealings in property refer to the difference between the amount of value received
by the taxpayer over the determined value of the property he has disposed of arising from sale, and/or
exchange of assets.

Amount realized P xx
Less: Cost basis XX
**Gain/(Loss) (Pxx)

In computing the gain or loss from the sale or other disposition of property, the cost basis shall be as
follows:

(DISCUSS USING THE BOOK)

ILLUSTRATION 2:

Case A (Holding Period-Individual Taxpayer):

An individual taxpayer, single, has the following data for the taxable year:

Ordinary income P 240,000

Ordinary loss 40,000
Capital gain on capital asset held for six (6) months 10,000
Capital gain on capital asset held for three (3) years 40,000
Capital loss on capital asset held for 15 months 10,000

Question: How much is the net taxable income?

Answer: P225,000 computed as follows:

Case B (Holding Period-Corporate Taxpayer):

Assume the same data in Case A, except that the taxpayer is a corporation.
Determine the taxable income of the corporation.

Answer: P240,000 computed as follows:

Holding period is not applicable to corporate taxpayers.

Case C (Holding Period & Net Capital "Loss"-Individual Taxpayer):

An individual taxpayer, single, has the following data for the taxable year:

Ordinary income P 240,000

Ordinary loss 40,000
Capital gain on capital asset held for six (6) months 10,000
Capital gain on capital asset held for three (3) years 40,000
Capital loss on capital asset held for 15 months 80,000

Question: How much is the net taxable income?

Answer: P200,000
Capital loss is deductible only to the extent of capital gain.

Case D (Net Capital "Loss" Carry Over - Individual Taxpayer):

Given the following data during the 2024 calendar year, determine the taxable income assuming the
taxpayer is a citizen of the Philippines.

Business income P 800,000

Business expenses 500,000
Compensation income 500,000
Capital gain on sale of bonds held for twenty (20) months P 60,000
Capital gain on direct sale to a buyer of shares of
domestic corporation held for six (6) months 150,000
Capital loss on sale of a car held for ten (10) months 50,000
Capital loss on sale of land in the Philippines held for two (2) years 100,000
Capital loss in 2023 (net taxable income in 2023 was 100,000) 200,000

Question: How much is the net taxable income?

Answer: P800,000

Solution:
Business income P 800,000
Business expenses (500,000)
Compensation income 500,000
Net capital gain:
Gain on sale of bonds (50%) 30,000
Capital loss - sale of car (100%) (50,000)
Net capital loss carry-over -
Taxable income P800,000

NET CAPITAL LOSS CARRY-OVER of a previous year is deductible only to the extent of net capital
gain in the succeeding year, In addition, the net capital loss carry over should not be more that the
taxable income of the previous year when the net capital loss was incurred. In the problem provided,
the taxpayer cannot avail of net capital loss carry over because capital loss was higher than capital gain
during the current year.

Case E (Net Capital "Loss" Carry Over - Individual Taxpayer):

Given the following data during the 2024 calendar year, determine the taxable income assuming the
taxpayer is a citizen of the Philippines.

Business income P 800,000

Business expenses 500,000
Compensation income 500,000
Capital gain on sale of bonds held for two (2) months P 60,000
Capital gain on direct sale to a buyer of shares of
domestic corporation held for six (6) months 150,000
Capital loss on sale of a car held for 2 years 10,000
Capital loss on sale of land in the Philippines held for two (2) years 100,000
Capital loss in 2023 (net taxable income in 2023 was 50,000) 200,000

Answer: P805,000 computed as follows:

Solution:
Business income P 800,000
Business expenses (500,000)
Compensation income 500,000
Net capital gain:
Gain on sale of bonds (50%) 60,000
Capital loss - sale of car (100%) (5,000)
Net Capital Gain 55,000
Net capital loss carry-over (50,000) 5,000
Taxable income P805,000

"The net capital loss carry-over should not be more than the net taxable income at the time the net
capital loss was incurred.

❖The remaining P150,000 (P200,000-P50,000) net capital loss incurred in 2023 is no longer allowed
as a net capital loss carry over after 2024.

Case F (Taxpayer-Domestic Corporation):

Business income P 800,000

Business expenses 500,000
Capital gain on sale of bonds held for twenty (2) months P 70,000
Capital gain on direct sale to a buyer of shares of
domestic corporation held for six (6) months 150,000
Capital loss on sale of a car held for 2 years 10,000
Capital loss on sale of land in the Philippines held for two (2) years 100,000
Capital loss in 2023 (net taxable income in 2023 was 50,000) 200,000

Answer: P360,000 computed as follows:

Solution:
Solution:
Business income P 800,000
Business expenses (500,000)
Net capital gain:
Gain on sale of bonds (50%) 70,000
Capital loss - sale of car (100%) (10,000)
Net Capital Gain 60,000 60,000
Taxable income P360,000

Rules on holding periods and capital loss carry-over are not applicable to corporate taxpayers.

CAPITAL GAINS SUBJECT TO PERCENTAGE TAX

Beginning January 1, 2018, a "Percentage tax of 6/10 of 1% of the gross selling price or gross value in
money of shares of stock sold, bartered, or exchanged through the local stock exchange (Listed Shares)
also known as Stock Transaction Tax. The following sellers or transferors of stock are liable to this tax:

a)Individual taxpayer, whether citizen or alien.

b)Corporate taxpayer, whether domestic or foreign.
c)Other taxpayers not falling under (a) and (b) above, such as estate, trust, trust funds, and pension
funds, among others.

The shares of stock referred to above pertain to shares of stock held as capital assets. The seller should
not be a dealer in securities, otherwise, the sale is subject to basic income tax as well as value added tax
(Refer also to Volume 2-Transfer and Business Taxation). Since the basis of the tax is gross selling
price, any gain or loss from sale or exchange is ignored. Therefore, regardless of whether the
transaction resulted in the realization of profit or loss, as long as a transaction occurred referring to a
sale or exchange of shares of stock held as capital asset in a local stock exchange, it is subject to a
percentage tax of 6/10 of 1% of gross selling price. The stock broker who effected the sale shall collect
the tax from the seller and remit the same to the collecting bank within five (5) banking days from the
date of collection thereof.

ILLUSTRATION 3:

George sold 2,000 shares of a domestic corporation listed in a local stock exchange at 110 per share
(Acquisition cost - P100 per share).
Question1: How much is the capital gains tax on the sale of shares?
Answer: P0. The transaction is exempt from capital gains tax.

Question2: How much is the income subject to basic or ordinary tax?

Answer: P0.

Question3: What is the applicable tax on the transaction?

Answer. Percentage tax of P1,320 computed as follows:

Selling price (2,000 sh. x P110) P220,000

X Percentage tax rate .006
Percentage/Transaction Tax P1,320

Question4: Assume that George is a dealer in securities, determine the applicable taxes and the
amount of tax due.

Answer. The transaction is subject to: Basic Income Tax based on the gain or loss on sale and Value
Added Tax (Business Tax) computed as follows:

Selling price (2,000 sh. x P110) P220,000

Cost (2,000 sh. x P100) (200,000)
Gross income subject to basic tax P20,000

Selling price (2,000 sh. x P110) P220,000

Cost (2,000 sh. x P100) (200,000)
Gross income subject to basic tax P20,000
X vat rate 12%
Output Vat (Business Tax) P2,400

Value Added Tax (VAT) is not an income tax. It is a business tax like percentage tax. Value Added
Tax is discussed in Volume 2 of this book entitled, Transfer and Business Taxation.

CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX

a. CAPITAL GAINS TAX on sale of shares of stock of a domestic corporation sold directly to a buyer
computed at a tax rate of 15% of capital gains

b. CAPITAL GAINS TAX on sale of real properties held as capital asset situated in the Philippines
computed at a rate of 6% of the highest amount among the selling price, fair market value and zonal
value.

Not applicable to foreign corporations

Refer to Chapter 2 (Individual Taxpayers) for a detailed discussions and illustrations on capital gains
tax.