Gains or losses in Dealings in Property
All real properties acquired in the course of trade or
1. Ordinary Assets
These are assets used in business, such as:
a. Stock in trade of a taxpayer or other real properties
of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of
the taxable year. (Trading securities and real estate
companies or construction companies).
b. Real property held by the taxpayer primarily for sale
to customers in the course of his trade or business
(real estate companies).
c. Real property used in trade or business of character
which is subject to allowance for depreciation
(Building and improvements of a company)
d. Real property used in trade or business of the
taxpayer
2. Capital Assets – it 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.
Real Estate dealer – it shall refer to any person engaged in
the business of buying and selling or exchanging real
properties on his own account as a principal and holding
himself out as a full or part time dealer in real estate
Note: all real properties acquired by real estate dealer is an
ordinary asset.
Real estate developer – shall refer to any person engaged in
the business of developing real properties into subdivisions or
building houses on subdivided lots, or constructing residential
or commercial units, townhouses and other similar units for
his own account and offering them for sale or lease.
Note: All properties acquired by the real estate developer
such as
a. Developed or undeveloped as of the time of
acquisition
b. All real properties primarily held for sale or lease to
customer in the ordinary course of business
c. All real properties used in trade or business, whether
in the form of land, building or other improvements
All are considered ordinary assets
Real Estate Lessor – shall refer to any person engaged in the
business of leasing or renting real properties on his own
account as a principal and holding himself out as lessor or
real properties being rented out or offered for rent.
Note: All real properties whether land or improvements,
which are for
a. lease or rent or being offered for lease/rent
b. or otherwise use or being used in trade or business
Considered as ordinary assets
Taxpayer engaged in the real estate business – it shall refer
collectively to real estate dealer, real estate developers, and
or real estate lessor.
Note:
a.
business by a taxpayer habitually engaged in the sale
of real estate shall be considered as ordinary assets.
b. Taxpayer who changed business from real estate
business to non-real estate business shall not result
in the reclassification of real property held from
ordinary to capital asset.
c. Taxpayer original registered to be engaged in the
real estate business but failed to subsequently
operate shall continue to be treated as ordinary
assets
d. Real properties acquired by banks through
foreclosure sales are considered as ordinary assets
Capital assets - Examples
a. Real property used by an exempt corporation in an
exempt operation (not considered used for business
purposes).
b. The classification of property transferred by sale,
barter or exchange, inheritance, donation, or
declaration of property dividends shall depend on
whether or not the acquirer uses it in business.
Used in business - ordinary
Not ued in business – capital
c. All the personal assets of taxpayer not engaged in
business
Exercises: Classify the following as ordinary assets or capital
assets.
1. Stock and securities held by the taxpayer as
investment. CA
2. Stock and securities held by dealers in securities. OA
3. Interest in partnership and joint venture. CA
4. Goodwill. CA
5. Real property not used in business. CA
6. House and lot. CA
7. Real property held for sale in the ordinary course of
trade or business by real estate company. OA
8. Real property used as a warehouse. OA
9. Parking space for lease. OA
Types of Gain or Loss on Dealing in Properties
1. Capital gain – gain from sale, exchange, or other
disposition of capital asset.
2. Ordinary gain – gain realized from the sale or
exchange of ordinary asset including gains from
performance of services and business.
3. Capital loss – loss from sale, exchange, or other
disposition of capital asset.
4. Ordinary loss – loss incurred from the sale or
exchange of ordinary asset. (net operating loss =
Deduction > gross income).
Two types of Capital Gain subject to Capital Gains Tax
1. Capital gains on the sale of domestic stocks directly
to buyer. (5% and 10%)
2. Capital gains on the sale of real properties not used
in business. (6%)
Note: Gain from other capital assets (regular income
tax)
Percentage Tax
A. Sale of shares of stock listed in local stock exchange.
(1/2 of 1% of gross selling price, regardless of
whether the transaction resulted to a gain or loss)
 B. Sale of shares of stock in the local stock exchange
through initial public offering (IPO). It shall be based
on the Gross Selling Price or Gross Value of money
of the shares sold.
Ratio = Shares sold, bartered exchange
Total Outstanding share
Ratio/Proportion Percentage Tax Rate
Up to 25% 4%
Over 25% but not over 33 1/3% 2%
Over 33 1/3 1%
SALES, EXCHANGE AND OTHER DISPOSITION OF DOMESTIC
STOCKS DIRECTLY TO BUYER
Sale of DOMESTIC STOCK for Cash
1. Preferred stocks (participating or cumulative)
2. Common stock
3. Stock rights Pre-emptive right
Rights are offers that allow existing stockholders to buy
additional shares at a predetermined price, for a set time
period. Shareholders do not have to exercise these
rights. They could let them expire. Alternatively, they
could be traded in the open market.
4. Stock options
A stock option is a contract between two people that
gives the holder the right, but not the obligation, to buy
or sell outstanding stocks at a specific price and at a
specific date. Options are purchased when it is believed
that the price of a stock will go up or down (depending
on the option type). For example, if a stock currently
trades at $40 and you believe the price will rise to $50
next month, you would buy a call option today so that
next month you can buy the stock for $40, sell it for $50,
and make a profit of $10. Stock options trade on a
securities exchange, just like stocks.
Mr. A Mr. C AB Corp.
AB Corp. does not issue the share to Mr. A but
instead Mr. C issued it. Mr C also recievd the money
from MR. A not the AB Corp.
5. Stock warrants
Stock warrants differs from an option in two key ways:
1. A stock warrant is issued by the company itself
2. New shares are issued by the company for the
transaction. Unlike a stock option, a stock warrant is
issued directly by the company. When a stock option is
exercised, the shares usually are received or given by one
investor to another; when a stock warrant is exercised,
the shares that fulfill the obligation are not received from
another investor, but directly from the company.
Companies issue stock warrants to raise money. When stock
options are bought and sold, the company that owns the
stocks does not receive any money from the transactions.
However, a stock warrant is a way for a company to raise
money through equity (stocks). A stock warrant is a smart
way to own shares of a company because a warrant usually is
offered at a price lower than that of a stock option. The
longest term for an option is two to three years, while a stock
warrant can last for up to 15 years. So, in many cases, a stock
warrant can prove to be a better investment than a stock
option if mid- to long-term investments are what you seek.
One of the main differences is that warrants are often good
for a number of years (up to 15). Options normally expire in
under a year, although some can extend for two or three
years.
Another difference between options and warrants is how
they originate. Warrants are normally only issued by the
company whose stock is subject to the warrant. The most
frequent way warrants are used is in conjunction with a bond.
A company will issue a bond and attach a warrant to the bond
to make it more attractive to investors. If they issuer's stock
increases in price above the warrant's stated price, the
investor can redeem the warrant and buy the shares at the
lower price.
For example, if the warrant has a strike price of $20 per share
and the market price of the stock rises to $25 per share, the
investor can redeem the warrant and buy the shares for $20
per share.
If the stock never rises above the strike price, warrants expire
worthless.
Mr. A X Corp – issue stock warrant
X Corp directly issue the shares and recived the money from
Mr.A
6. Unit of participation in any association, recreation or
amusement club (golf, polo clubs etc.)
Exchange of Domestic Stocks in kind and other disposition
such as:
1. Foreclosure of property in settlement of debt
2. Pacto de retro sales – sale with buy back agreement
3. Conditional sales – sales which will be perfected
upon completion of certain specified condition
4. Voluntary buyback of shares by the issuing
corporation – redemption of shares which may be
reissued and not intended for cancellation.
The term other disposition does not include
1. Issuance of stocks by a corp. including treasury share
- The excess of par value from issuance is considered as
share premium and not an income and not subject to
capital gains tax.
2. Exchange of stocks for services – it is not considered as
an exchange of property. NO gain or loss can be imputed
as it involves payment of expense in kind.
3. Redemption of shares in a mutual fund – it is exempted
by NIRC from income taxation
4. The worthlessness of stocks – it is a capital loss
5. Redemption of stocks for cancellation by the issuing corp
– mandatory redemption of stocks by issuing corp. for
purposes of stock cancellation shall be subject to regular
income tax
6. Gratuitous transfer of stock – it is subject to transfer tax
Example: The following transactions were entered by Mr.
Tee for the current year:
1. Mr. Tee, is non dealer of stock sold 2,000 shares in
the stock exchange at P110 per share. The shares
were acquired at P100 per share 2 years ago.
2. Mr. Tee, is non dealer of stock sold 2,000 shares
directly to buyer at P180 per share. The shares were
acquired 3 months ago at P105 per share.
3. Mr. Tee, is non dealer of stock sold 2,000 shares
directly to buyer at P100 per share. The shares were
acquired 2 years ago at P105 per share.
4. Mr. Tee, is a dealer of stock sold sold 2,000 shares in
local stock exchange forP180 per share. The shares
were acquired 3 months ago at P105 per share.
What is the amount of capital gains tax?
Answer
1. .005 x 2,000 sh. X P110)
2. SP 360,000 – Cost 210,000 = capital gain 150,000
Capital gains tax 5,000 (100K x 5%) + 5,000 (50K x
10%) = 10,000.
3. It is not subject to capital gains tax because it
resulted to a loss.
4. Mr. Tee shall not be subject to stock transaction
stock of 1/2of 1%. The P150,000 gain is an ordinary
gain subject to regular income tax.
Illustration of IPO
A domestic Corp. is in need of additional capital decided
to sell its shares to the public for the first time. The corp.
has 600,000 outstanding shares with par value of P10 per
share prior to listing on the stock exchange. At IPO, the
corporation sold 200,000 shares at P12 per share
What is the amount of tax?
A. What is the amount of final income tax for these real
estate transactions?
B. Assume that the residential lot in number 2 was sold
at P3M. What is the amount of final tax?
Answers
A.
1. It is an ordinary asset, not subject to capital gains
tax. P3M – P1M = P2M is included in the
determination of gross income which is subject to
basic tax or regular income tax.
2. P6M selling price is the higher amount x 6% =
P360,000 capital gains tax.
3. The final tax is P0 because it is outside the
Philippines. The property is classified as ordinary
assets
B. FMV 5M is higher x 6% = 300,000 capital gains tax
Sale of Residential Property (Principal Residence – the
primary domicile of the seller )
The sale, exchange or other disposition of a principal
residence for the acquisition of new principal residence is
exempt from capital gains tax.

Answer: Percentage tax of 200,000 shares x P12 = REQUISITES for EXEMPTION

2,400,000 x 4% = 96,000 1. The seller must be a RC, NRC or RA
Ratio = 200,000/800,000 = 25% 2. It involves the principal residence of the seller
3. The proceeds from sale is used to acquire for tnew
Illustration: Annualized Capital Gains Tax principal residence of the seller.
Mrs. Tan disposed several equity shares directly to 4. The BIR is notified by the taxpayer of his intention to
buyer during the year 2017 avail of the exemption within 30 days of the sale. BIR
Form 1706 and sworn declaration of intent.
Date Selling Price Cost Capital Gain (loss) 5. The re-acquisition of new principal residence must be
Feb. 1 200,000 120,000 80,000 within 18 months from the date of sale
May 1 100,000 120,000 (20,000) 6. The exemption can only be availed once every 10 years.
Oct 1 500,000 300,000 200,000 7. The capital gains tax is held escrow n favor of the
Total 260,000 government
8. The historical cost or adjusted basis of the principal
Answer: residence shall be carried over to the new principal
Feb 1 payment = 80K x 5% = 4,000 residence.
May 1 0
Oct 1 = 1st 100 x5% = 5,000 + 100K x 10% = 15,000 Illustration:
Ms. Ela is resident citizen. She sold her principal residence for
Annualized P1,000,000. The FMV of the property is P1,500,000. The
1st 100K x 5% = 5,000 property was purchased 5 years ago for P700,000. Ms. Ela
Excess 160,000 x 10% = 16,000 notified the BIR regarding the sale.
Total 21,000 – CGT pais 19,000 = 2,000 CGT payable
1. How much is the capital gains tax assuming the entire
proceeds were used to acquire a new principal
Capital Gains Tax of 6% on the sale of Real Property residence?
held as Capital Assets. (6% of Gross Selling Price or FMV 2. How is the capital gains tax assuming only P500,000 of
whichever is higher). the proceeds were used to acquire a new principal
residence?
FMV is the zonal Value (value prescribed CIR) or 3. What is the cost basis of the new principal residence
Assessed value (value prescribed by City or Municipal assuming the entire proceeds were used to acquire the
Assessor) new principal residence?
4. What is the cost basis of the new principal residence
Illustration of 6% capital gains tax: The following are the assuming P800,00 were used to acquire the new
transaction of an individual taxpayer pertaining to the principal residence and how much is the capital gains
sale of real properties for the current year. tax?
1. Sale of parcel of land used in his trading. Selling price 5. What is the new cost basis of the new principal
is P3M. The property was acquired 5 year ago at residence, assuming P1,200,000 were used to acquire the
P1M. new principal residence and how much is the capital
2. Sale of the taxpayer’s residential lot for P6M. The gains tax?
fair market value of the property was P5M. the cost Formula of CGT payable
of the property at the time of purchased, 2 years ago 6% x (FMV or SP whichever is higher) = CGT
was P3M. CGT x unutilized/SP = CGT payable
3. Sale of parcel of land used in its operations abroad.
Selling price P3M. The property was acquired 2 years Formula of New Cost basis
ago at P1.5M. A. If fully utilized
Cost of the old property xx Illustration: Mr. Yu who is not a dealer in securities has the
Add: Additional cost incurred (AC of new - SP xx following selected transactions
New cost basis xx Jan. 5,2016 Purchased 100 shares of XT Corp P100,000
Dec. 15 Purchased additional shares 50 shares of XT P75,000
B. if not fully utilized Dec. 28 sold 100 shares purchased on Jan 5 P90,000
Cost of the old property xx Jan. 3, 2017 Purchased 25 shares of Xt Corp P25,000
Multiply By: Utilized Portion/SP % June1, 2017 Sold shares purchased on Dec. 28 120,000
New cost basis xx
How much is loss from wash sale?
How much is the deductible capital loss?
Answer How much is the cost of shares purchased on Dec. 15?
1. 0 – exempt How much is the cost of shares purchased on Jan. 3?
2. 6% x FMV higher 1,500,000 = 90,000 x ½ = 45,000 How much was the capital gain on sale of shares on June 1,
3. 700,000 2017?
4. 700,000 x 800/1,000K = 560,000 new cost
CGTP 200K/1,000K x 90,000 = 18,000 Answer
1. SP 90,000 – cost 100,000 = (10,000)
5. Cost of the old property 700,000 Capital loss 10,000 x 75/100 = 7,500 capital loss added to
Add: Additional cost incurred (1.2M -1!M) 200,000 the cost of securities purchased
New cost basis 500,000
2. 10,000 x 25/100 = 2,500 deductible capital loss
CGT is 0 - exempt 3. Dec. 15 Cost 75,000 + 5,000 (50 purchased/75 sold x
7,500 capital loss added) = 80,000
Wash Sales – purchased 30 days before and 30 days after the 4. Cost 25,000 + 2,500 (25 purchased/75 sold x 7,500) =
sale of shares (61 day period). The taxpayer has acquired (by 27,500
purchased or exchanged) or has entered into a contract or 5. SP 120,000 – cost 80,000 = 40,000 gain on sale
option to acquire substantially identical securities (bonds) or
stock. INSTALLMENT PAYMENT OF CAPITAL GAINS TAX ON
INDIVIDUAL
Substantial means same class and same feature of stock or
bonds Rule: Initial Payment/Selling Price = does not exceed 25%
of the selling Price
Note: non-deductibility of losses from wash sales because the
loss is not actually sustained or incurred by the seller. CGT payable = Initial Payment/Contract Price x Capital gains
However, the amount of loss not deductible from gross tax
income shall form part of the cost of acquiring securities
FORMULA FOR INITIAL PAYMENTS
The following exchanges are not wash sales Downpayment xx
1. Common stock to preferred stock Add: Installment payment in the year of sale xx
2. Voting to non-voting stock Less: Excess of mortgage assumed by buyer
3. Stock of one corporation to stock of another corporation over the cost of the seller xx
4. Bonds that differ in terms and condition such as interest Total Initial Payments XX
rates and debenture (unsecured bonds or no collateral)
and non- debenture (secured or with collateral). FORMULA FOR CONTRACT PRICE
Selling price xx
Illustration: Mr. Yap is not a dealer of securities. In 2017, he Less: Mortgage assumed by buyer, if any (XX)
had the following transactions o ordinary shares of X Corp., a Add: Excess of mortgage over the cost of the seller XX
domestic Corp. Contract Price xx

Jan. 12 Purchased 100 shares P100,000 SELLING PRICE

June 20 Sold the shares purchased on Jan. 12 80,000
June 30 Purchased 70 shares 50,000
Oct. 15 Sold the shares purchase on June 30 75,000
How much was the loss from wash sale?
How much is the deductible capital loss?
How much was the cost of shares purchased on June30?
How much was the capital gain on sale of shares on Oct. 15?
Answer:
1. SP 80 – cost 100 = capital loss (20)
Capital loss 20,000 x 70/100 = 14,000 deferred loss
which is added to the cost new acquired stock
2. Capital loss 20,000 x 30/100 = 6,000 deductible
capital loss
3. 50,000 + 14,000 = 64,000
4. SP 75,000 – 64,000 = 11,000 capital gain
Cash received xx
FMV of property received xx
Installment obligation of buyer (evidence of indebtedness) xx
Mortgage assumed by the buyer xx
Total Selling Price xx
Illustration: Assume that on Jan. 2 , 2017, Mr. X an individual
taxpayer, sold a piece of land with adjusted basis of P600,000
for P1,000,000. Under the following terms: P200,000 down
payment, balance in five annual installments beginning 2018.
The total capital gains tax is:
Total capital gains tax payable in year 2017 is:
Total capital gains tax payable in year 2018 is:
Rule: Initial Payment 200,000 DP/1,000,000 = 20%
1. 1,000,000 x 6% = 60,000
2. 200,000 / 1,000,000 CP x 60,000 = 12,000
3. Balance 800,000/5 = 160,000 installment
payments/ 1,000,000 CP x 60,000 = 9,600
Note: If the property sold is not subject to mortgage, 3. How much should Mark recognized from sale of G Corp
contract price is equal to selling price shares?
4. Assume the ssame data, except that the FMV of G shares
Illustration 2: Assume that in 2012, Mr. X acquired a was P30,000. Assume further that G Corp shares were
property for P600,000. In 2017, he sold the property for P1 subsequently sold at P80,000.
million, Terms of sale: Down payment, Oct 1, 2017, P100,000; a. How much should Mark recognized as gain/loss from the
mortgage assumed P400,000; balance of P500,000 payable in transaction?
four annual installments beginning Jan. 2, 2018. The taxpayer b. What is the adjusted cost basis of G Corp shares received?
elects to pay the tax on the gain in installments. c. How much should Mark recognized as gain from the sale of
G Corp shares?
The total capital gains tax is:
Total capital gains tax payable in year 2017 is: Formula: Gain or Loss
Total capital gains tax payable in year 2018 is: FMV of shares received xx
Add: Cash or property received xx
Rule IP 100,000 / 1,000,000 = 10% Less: Cost of shares surrendered (xx)
Indicated gain (loss) XXX
Selling price DP 100 + mortgage assumed 400 + inst 500 =
1,000,000 Formula: Adjusted Cost Basis
Answer: Cost of shares surrendered xxx
1. 1,000,000 x 6% = 60,000 Less: Cash or property received (xx)
2. 100K IP / CP 600K (SP 1,000,000 – mortgage Add: Gain recognized xxx
assumed 400,000)x 60,000 = 10,000 Adjusted cost basis xxx
3. Inst 500/4 = 125 / CP 600 x 60 = 12, 500
Answer
Note: If property is subject to mortgage, contract price is 1. FMV of shares received 150,000
equal to selling price less mortgage assumed Add: Cash or property received (30+10) 40,000
Less: Cost of shares surrendered (90,000)
Illustration: Assume that in 2009, Mr. Yee sold for P1,000,000 Indicated gain (loss) 100,000
a piece of land which he bought in 2002 for P400,000. Prior to
the sale, the property was mortgage for P600,000. The terms Recognized gain is only 40,000 the amount of cash and
of the sale are as follows: Down payment P100,000; property.
assumption of unpaid mortgage P500,000; the balance of
P400,000 payable in four annual payments beginning Jan. 2, 2. Cost of shares surrendered 90,000
2015. The taxpayer elects to pay in installments Less: Cash or property received (40,000)
Add: Gain recognized 40,000
The total capital gains tax is: Adjusted cost basis 90,000
Total capital gains tax payable in year 2017 is:
Total capital gains tax payable in year 2018 is: 3. SP 110,000 – 90,000 adjusted cost basis = 20,000 gain on
sale
Excess of mortgage 500 – 400 = 100
Contract Price = 1,000,000 – 500K mortgage assume + 100 4. FMV of shares received 30,000
excess mortgage = 600K Add: Cash or property received (30+10) 40,000
Less: Cost of shares surrendered (90,000)
Answer Indicated gain (loss) (20,000)
Rule: IP (100 + excess of mortgage to cost of property 100) =
IP 200 / SP 1M = 20% The loss of 20,000 is not recognized

1. 1000,000 x 6% = 60,000 b. Cost of shares surrendered 90,000

2. IP 200/ CP 600 x 60K = 20,000 Less: Cash or property received (40,000)
3. 400 / 4 = 100 inst collection / 600 x 60K = 10,000 Add: Gain recognized 0__
Adjusted cost basis 50,000
MERGER OR CONSOLIDATION
In a merger involving exchange of stocks solely for stock – No c. SP 80,000 – 50,000 = 30,000
los is recognized.
Illustration 2: Mr. Yee exchanges his shares in AB Corp
However, in addition to stock such as Cash or property costing P3,000,000 in exchange for the shares of AB Corp.
received – Gain if any is recognized not exceeding the with fair value of P2,700,000 plus P300,000 cash and
amount of money or FMV of property received. P600,000 properties.

Illustration of Merger
F Corp. was merged into G Corp, and only G Corp continues to
exist. Mark, a stockholder of F Corp was asked to surrender
his 100 shares of F Corp that he acquired for P90,000 and
receive under the merger 100 shares of G Corp. with FMV of
P150,000 and cash of P30,000 and property valued at
P10,000. G Corp shares were subsequently sold at P110,000
1. How much should Mark recognize as gain from the
merger?
2. What is the adjusted cost basis of G shares received?
1. How much should Mark recognize as gain from the
merger?
2. What is the adjusted cost basis of G shares received?
BIR FILING OF RETURN FOT CAPITAL GAINS TAX
a. BIR Form 1707 shall be filed 30 days after each sale,
exchange and other disposition of stocks.
b. Installment method – 30 days after each installment
c. Annual capital gains tax return BIR For 1707-A on or
before the 15th day of the fourth month following
the close of the table year of the taxpayer.
 Quarterly Income Tax 1st 250,000 50,000
Illustration:Mr. X is married with four qualified
excess 110,000 x 30% 33,000
dependent children, incurred the following quarterly
business income and expenses Total 83,000
1st 2nd 3rd 4th Less tax paid
Sales 240,000 360,000 420,000 540,000 1 7,000
COGS 120,000 180,000 210,000 270,000 2 25,500
Business expenses 60,000 60,000 60,000 90,000 3 41,500
Tax payable 9,000
Compute the quarterly income tax

Net income 60,000

BPE -
AE -
Taxable income 60,000

1st 30K 2,500

excess (30,000 x 15%) 4,500
Tax due 7,000

2nd qtr
Net Income 120,000
Add: 1st Qtr Net income 60,000
Taxable income 180,000

1st 140,000 22,500

excess 40,000 x 25% 10,000
tax due 32,500
Less tax paid 1st QTr 7,000
Tax payable 25,500

3rd qtr
Net income 150,000
Add: 1st qtr Net income 60,000
2nd qtr 120,000
Taxable income 330,000

1st 250,000 50,000

excess 80,000 x 30% 24,000
Tax due 74,000
Less tax paid
1st 7,000
2nd 25,500
Tax payable 41,500

4th qtr
Net income 180,000
Add: Net income
1 60,000
2 120,000
3 150,000
Total net income 510,000
Less BPE (50,000)
AE (100,000)
Taxable income 360,000