SALES OR EXCHANGES OF CAPITAL ASSETS AND OTHER PROPERTIES

Capital assets – properties that are not used in trade or business of Real Properties: Ordinary Asset vs. Capital Asset
the taxpayer
Ordinary Assets: Real Properties
Ordinary assets – properties used in trade or business by the
taxpayer 1. Those that are currently being used in trade or business
(present)
1. Stock in trade or other property included in inventory if on 2. Those that are purchased for future use in the business
hand at the close of the taxable year (future)
a. Supplies on hand 3. Those that have been previously used in the business
b. Merchandise inventory (past, but not more than 2 years)
c. Raw materials 4. Those acquired by taxpayers who originally registered to
d. Goods in process be engaged in real estate business but failed to
e. Finished goods subsequently operate
2. Property primarily for sale to customers in the ordinary 5. Properties received in a tax-free exchange by taxpayers
course of trade or business who are engaged in or will use the property in business
a. Sale by the subdivision developer
3. Personal property used in the trade or business and 6. Properties sold by persons who executed at least 6 real
subject to depreciation – not for sale by the business property sales transaction in the prior year
either primarily or incidentally, but for use in the ordinary Capital Assets: Real Properties
course of trade or business
a. Store and office equipment 1. Those that are not used in trade or business
b. Delivery equipment of a trucking business 2. Those that were formerly used in business but are proven
4. Real property used in the trade or business to have not been used for more than 2 years prior to the
a. Land and buildings for rent taxable transaction
b. Agricultural land used by the owner in his 3. Assets that are transferred thru succession or donation to
farming business the heir/done who is not engaged in trade or business

Cost – is the amount paid for the property in cash or the fair value
given in exchange
Capital gain – result when the selling price of a capital asset is
greater than its cost
Note: If a certain proportion of the property is used for business,
then that proportion shall be considered ordinary asset. The
remaining portion that is not used for business shall be considered
capital asset.

Capital loss – result when the selling price of a capital asset is less
than its cost Subject to Capital Gains Tax

Net capital gain – is the difference if the selling price of a capital 1. domestic stocks directly to a buyer - 15% CGT
asset is greater than its cost - self-assessment method
- filing is annual net gain or 30 days after
Net capital loss – is the difference if the selling price of a capital 2. real property (capital assets) - 6%
asset is less than its cost - final withholding tax
Holding period – is the length of time the asset has been held by an - filing is per transaction (30 days after)
individual taxpayer; it covers the period from the date of acquisition Exceptions on real property CGT
to the date of sale/exchange
1. exemption rule - CGT is 0
a. residence rule eme
Rules on determining the Holding Period (only applicable to 2. alternative taxation - choose between
individual taxpayers) a. 6% CGT or
b. Gain is reported under RIT
● The day of acquisition is excluded and the disposal date is
included
● Held for only one year – if the date of disposition is the
same as the date of acquisition, but a year later CGT may be paid in installment

● Held for more than 1 year or 12 months – if the date of Rule: Initial Payment must not exceed 25% of Selling Price
disposition is the same as the date of acquisition, but a
(collection/total collection) x tax due = tax payable
year later, plus one day
Rules on Capital Asset Transactions

● Tax rate: 6% Capital Tax

● Capital losses is deducted only from capital gain

● When computing for taxable income

o Net capital gain is added

o Net capital loss is not (just ignore it)

For Individuals:

● Holding period is considered

● Capital Losses can be carried forward

For Corporations:

● No holding period is considered

● Capital losses is not carried forward

Steps in Computing for Taxable gain/loss and Capital tax due For Corporation taxpayers

For individual taxpayers

1. Compute for taxable gain/loss.
1. Compute for taxable gains/losses. It depends on the Holding period is not taken into account.
holding period

Holding Period Rate CA1: (Selling Price – Cost) = Taxable Gain/(Loss)

Short-term (held for not more than 12 100% CA2: (Selling Price – Cost) = Taxable Gain/(Loss)

months) CA3: (Selling Price – Cost) = Taxable Gain/(Loss)

Total Taxable Gain/(Loss)
Long-term (hold for more than 12 months) 50%

2. When computing for taxable income

CA1: (Selling Price – Cost) x Rate = Taxable Gain/(Loss)
a. capital losses are deductible only from the
CA2: (Selling Price – Cost) x Rate = Taxable Gain/(Loss)
capital gains and not from income
CA3: (Selling Price – Cost) x Rate = Taxable Gain/(Loss)
b. corporations cannot vary over the net capital
Total Taxable Gain/(Loss)
loss

cost includes
1. commission expense
● Gain on sale of real property (except land and/or buildings)
2. documentary stamp tax - if assumed by the seller
is an ordinary gain

2. When computing for taxable income ● Capital gains or losses of professional partnership will be
a. capital losses are deductible only from the
accounted for by the partners in proportion to their
capital gains and not from income
interest in the partnership
b. Carry-over the net capital loss from last year to
the taxable gain/(loss) this year
i. Must not exceed the previous year’s
taxable income
ii. Good only for 1 year
Transactions Resulting in Capital Gains/Losses even if there is no Sales of Real Property Classified as Capital Assets
Sale of Capital Assets
Tax Rate: 6% Capital Gains Tax
1. Retirement of bonds, debentures, notes or certificates or Based on:
other evidences of indebtedness
2. Short sales of property – treated as short-term capital 1. Gross Selling Price
gain/loss 2. Fair Market Value
3. Option gains and losses 3. Zonal Value (only available on land, with the exception of
4. Securities becoming worthless condominium units, buildings, and other improvements)
5. Liquidating dividend – when a corporation distributes all of *prevailing at the time of sale
its assets in complete liquidation *whichever is highest
a. Gain on liquidation – the first payments are
applied against the cost. The gain is returnable
only when he has completely recovered Requisites for the Rule to be applied
b. Loss on liquidation – can be taken only upon the
1. Sale, exchange, or disposition of property
distribution of the final liquidating dividend
2. Property must be a real property
6. Liquidation of partnership – when a partner retires or the
3. It must be a capital asset
partnership is dissolved
4. The seller must be individual, estate or trust
5. The real property must be located in the Philippines

Definition of Terms
Short sale – is a transaction in which the speculator sells securities
which he does not own (he merely borrows the stock certificate
through or from his stockbroker)
Option – is a contract granting a person the exclusive privilege to
buy or not to buy a certain objects at any time within the agreed
period at a fixed price
Options of the taxpayer if the property is sold/disposed in favor of
the government or any of its political subdivisions/agencies or to the
government owned or controlled corporations:
1. Pay the tax based on this rule
a. The sale shall be filed and paid within 30 days
2. Include the gain in his gross income subject to the
graduated rates of tax

Consideration – supports the options contract which is distinct from

the purchase price Note: The date of sale or disposition shall be the date of notarization
of the sales documents
 If there is no full utilization of the proceeds from sale for the
acquisition of new residence

● Unutilized portion – subject to tax + deficiency of capital

gains tax inclusive of 12% interest per annum computed
Sale of Principal Residence by Individuals form the 31st day after the date of sale/disposition
Tax Rate: 6% Capital Gains Tax
Based on:
Sale of Lands and/or Buildings by Corporations
1. Gross Selling Price
2. Fair Market Value Tax: 6% final tax
3. Zonal Value (only available on land, with the exception of
Based on: whichever is higher between
condominium units, buildings, and other improvements)
1. Gross selling price
*prevailing at the time of sale
*whichever is highest 2. Fair market value

Principal residence – refers to the dwelling house, including the land Documents to be submitted to the BIR
on which it is situated, where the husband and wife, or an
1. Copy of notarized deed of sale or exchange
unmarried individual, whether or not qualified as head of family, and
2. Photocopy of
members of his family, reside
a. Transfer Certificate of Title
When filing for ITR b. Original Certificate of Title
c. Condominium Certificate of Title
1. It is presumed that the residential address filled out is the 3. Certified True Copy of the latest tax declaration on lot
true residential address and/or improvement
2. In case of condominium units, the certification of Brgy 4. Certification from the Assessor’s Office that there is no
Chairman or Building Administrator is necessary existing improvement on the property or that the
improvement is in the name of another – if what is sold is
Exempt from Tax (Requisites):
lot only
5. Copy of BIR Ruling for tax exemption confirmed by the BIR,
● If the proceeds of sale shall be utilized in acquiring new
if applicable
residence within 18 calendar months from the date of sale 6. Duly approved Tax Debit Memo, if applicable
● The taxpayer duly notified the BIR of this intention to avail 7. For amended return, proof of tax payment and the
the exemption previously filed return
8. “Sworn Declaration of Intent” as prescribed by Revenue
● The exemption can only be availed of once every 10 years Regulations 13-99 – if the transaction is tax-exempt
● 6% Capital gains tax due on presumed capital gains shall be
deposited in interest bearing account with an authorized
bank under an Escrow Agreement. The Revenue District
Officer (RDO) shall release the escrow once the proceeds
of sale had already been fully utilized in acquisition of new
principal residence.

If the seller/transferor fails to submit documentary evidence within

30 days after the lapse of 18-month period

His tax due is computed as follows:

6% capital gains tax

25% surcharge (of the capital gains tax)
12% interest per annum computed from the 31st day after the sale
Total
Less: Deposit in escrow
Less: Interest earned in escrow
Deficiency Capital Gains Tax
Sale Of Real Property Which Are Not Capital Assets

Tax: creditable withholding tax

Tax base: Whichever is higher

1. Gross selling price or total amount of consideration

2. Fair market value
Steps in Computing for Taxable Income after Sale of Real Property
Tax Rate which are not Capital Assets

Exempt Where the seller/transferor is exempt from creditable For Individuals

withholding tax
Net Income
6% Where the seller/transferor is not habitually engages Selling Price
in the real estate business (Book Value of Real Property)
(Agent’s Commission)
Taxable Income

Where the seller/transferor is habitually engaged in real estate

business

1.5% With a selling price of P500,000 or less

3% With a selling price of more than P500.000 –

P2,000,000

5% With a selling price of more than P2,000,000

A seller is considered as habitually engaged in real estate business if

1. He/it is registered with Housing and Land Use Regulatory

Board (HLURB) or Housing and Urban Development
Coordinating Council (HUDCC); or
2. He/it consummated at least 6 taxable real estate
transactions during the preceding year, regardless of
amount

Note: Banks shall not be considered as habitually engaged in the real

estate business.
Sale of Real Property Not Located in the Philippines
Subject to: Ordinary Income Tax
Stock Transactions (if stocks are not listed and traded in the stock
For corporations: whichever is applicable exchange)
1. Normal income tax
Tax rate: 15% capital gains tax
2. Minimum corporate income tax
Tax base: net capital gain

For non-resident citizen, alien individual or foreign corporation

1. Exempt because they are taxable on income within only. Filing of Return

● Within 30 days after each transaction

● On or before the 15th of the 45th month – for final

consolidated return of all transactions during the taxable

year

Real Property Subject of Involuntary Transfer

Ordinary or Capital Asset?
Stock Transactions (if stocks are listed and traded in stock
● POV of the seller: Classified as capital or ordinary asset
depends on how the seller used it exchange) or STOCK TRANSACTION TAX

● POV of the buyer: Classified as capital or ordinary asset ● Not subject to income tax
depends on how the buyer will use it
● Rate: 6% of 1% stock transaction tax

Base: gross selling price

 1. capitalize the loss
Wash Sales Rule
New Cost + Loss = Cost; purpose is to revert back to the old cost
1. if there is loss, check if there is an identical security
acquired 30 days after
2. check if there is an acquired security that is identical to
securities sold 30 days before
3. if above are present, add the loss
Treatment for Losses

● Not deductible as losses from sales or exchanges of

property

Wash Sale Provisions do not apply to

1. Individuals or corporations acting as dealer in stock
a. Stockbrokers
b. Banks
Losses from wash sales of stocks or securities
c. Trust companies
Wash sale – is a sale of securities where substantially identical
2. Short sales transactions
securities are required or purchased within a 61 day period
3. Gains in wash sales as such gains are taxable
beginning 30 days before the sale and ending 30 days after the sale

Substantially identical – means that the stock must be of the same

class, or in the case of bonds, the terms thereof must be the same;
there is similarities on all important particulars

wash sales = FAKE FEIGNED SALES of stocks and other securities like
bonds

Parang ni revalue lang yung shares. “ni-wash” from 10K to 6K by

selling it then buying it again
Wash Sales Requisites
1. there is capital loss (as a result of selling)
2. sold shares is covered up by buying shares (must be
identical)
example: before buying and selling, 1000 ang shares. after
all the buy and sell, yung shares sold ay nacover up (some
or all)
What to do?
Particulars Taxation
Sale of Real Property Classified Tax Rate: 6% Capital Gains Tax
as Capital Assets
Tax base: *whichever is highest
(1) Gross Selling Price
(2) Fair Market Value or Assessed ValueAQ
(3) Zonal Value (only applicable on land, with the
exception of condo units, buildings, and
improvements)
*prevailing at the date of sale
Sale of Principal Residence by Tax Rate: 6% Capital Gains Tax
Individuals
Tax base: *whichever is highest
(1) Gross Selling Price
(2) Fair Market Value
(3) Zonal Value (only applicable on land, with the
exception of condo units, buildings, and
improvements)
*prevailing at the time of sale
Note:
Exempt from Tax (Requisites):
● If the proceeds of sale shall be utilized in
acquiring new residence within 18 calendar
months from the date of sale
● The taxpayer duly notified the BIR of this
intention to avail the exemption
● The exemption can only be availed of once
every 10 years
● 6% Capital gains tax due on presumed capital
gains shall be deposited in an interest bearing
account with an authorized bank under an
Escrow Agreement. The Revenue District
Officer (RDO) shall release the escrow once the
proceeds of sale had already been fully utilized
in acquisition of new principal residence.
If the seller/transferor fails to submit documentary
evidence within 30 days after the lapse of 18-month
period
His tax due is computed as follows:
6% capital gains tax
25% surcharge (of the capital gains tax)
12% interest per annum computed from the 31st day
after the sale
Total
 Less: Deposit in escrow
Less: Interest earned in escrow
Deficiency Capital Gains Tax

If there is no full utilization of the proceeds from sale for

the acquisition of new residence

● Unutilized portion – subject to tax + deficiency

of capital gains tax inclusive of 12% interest
per annum computed form the 31st day after
the date of sale/disposition

Sale of Lands and/or Buildings Tax: 6% final tax

by Corporations
Based on: whichever is higher between

(1) Gross selling price

(2) Fair market value

Sale of Real Property Which are Subject to creditable withholding tax

Not Capital Assets Exempt Where the seller/transferor is exempt
Based on: Whichever is higher
from creditable withholding tax
(1) Gross selling price or total amount of
consideration
6% Where the seller/transferor is not
(2) Fair market value habitually engages in the real estate
business

Where the seller/transferor is habitually engaged in

real estate business

1.5% With a selling price of P500,000 or

less

3% With a selling price of more than

P500.000 – P2,000,000

5% With a selling price of more than

P2,000,000

Sale of Real Property Not Subject to Ordinary Income Tax

Located in the Philippines

For Corporations: whichever is applicable

1. Normal income tax

2. Minimum corporate income tax

For Non-Resident Citizen, Alien or Foreign:

3. Exempt because they are taxable on

income within only

Real Property subject of POV of the seller: Classified as capital or ordinary Includes
involuntary transfer asset depends on how the seller used it 1. Involuntary sales such as expropriation or
foreclosure sale

POV of the buyer: Classified as capital or ordinary

asset depends on how the buyer will use it

Capital gains on stock Not sold through the stock exchange

transactions
Tax rate: 15% capital gains tax

Tax base net capital gain

Sold through the stock exchange

Tax rate: 6/10%

Tax base: gross selling price