Excel Professional Services, Inc.

Management Firm of Professional Review and Training Center (PRTC)

(LUZON) Manila 87339344 * Calamba City, Laguna * Dasmariñas City, Cavite * Lipa City,
Batangas (0917) 8852769 * (VISAYAS) Bacolod City (034) 4346214 * Cebu City (032)
2537900 loc. 218 (MINDANAO) Cagayan De Oro (0917) 7081465 * Davao City (082) 2250049

TAXATION

TAX 3150 – CA Vs OA and CGT C. NARANJO/ A. SIAPIAN/ V. GUDANI

OCT 2021

CAPITAL ASSETS (SECTION 39 OF THE TAX CODE AND RR 7-2003)

1. Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his trade
or business, and which are not included among the real properties considered as ordinary assets under
Sec. 39(A)(1) of the Code.

2. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets
under Sec. 39(A)(1) of the Code, namely:
a. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year; or
b. Real property held by the taxpayer primarily for sale to customers in the ordinary course of
his trade or business; or
c. Real property used in trade or business (i.e., buildings and/or improvements) of a character
which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code;
or
d. Real property used in trade or business of the taxpayer.
3. Taxpayers engaged in the real estate business are:
a. real estate dealers
b. real estate developers, and/or
c. real estate lessors.
4. “Taxpayers not engaged in the real estate business” - shall refer to persons other than real estate dealers,
real estate developers and/or real estate lessors.
RULES IN DETERMINING CAPITAL OR ORDINARY ASSET
a) ORDINARY ASSETS OF taxpayers engaged in the real estate business:
1. All real properties acquired by the real estate dealer
2. All real properties acquired by the real estate developer, whether developed or undeveloped as
of the time of acquisition
3. All real properties of the real estate lessor, whether land, building and/or improvements, which
are for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade
or business
4. All real properties acquired in the course of trade or business by a taxpayer *habitually engaged
in the sale of real property shall be considered as ordinary assets.

NOTES:
Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a
taxpayer to be considered as habitually engaged in the sale of real estate.

*consummation during the preceding year of at least six (6) taxable real estate sale transactions,
regardless of amount

A property purchased for future use in the business, even though this purpose is later thwarted by
circumstances beyond the taxpayer’s control, does not lose its character as an ordinary asset. Nor does
a mere discontinuance of the active use of the property change its character previously established as
a business property.
1.
2. If taxpayer is engaged in real estate business, all real properties are ordinary asset even if idle or
abandoned (conversion is not allowed)
 b) In the case of taxpayer not engaged in the real estate business, real properties, whether land, building,
or other improvements, which are used or being used or have been previously used in trade or business
of the taxpayer shall be considered as ordinary assets.

AUTOMATIC CONVERSION
3. Properties classified as ordinary assets for being 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 transactions involving said properties.

c) In the case of taxpayers who changed its real estate business to a non-real estate business, real
properties held by these taxpayers shall remain to be treated as ordinary assets.

d) In the case of taxpayers who originally registered to be engaged in the real estate business but failed
to subsequently operate, all real properties acquired by them shall continue to be treated as ordinary
assets.

e) Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate
business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the
real estate business, which were later on abandoned and became idle, shall continue to be treated as
ordinary assets.

f) 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 hands of
the buyer/transferee shall be determined in accordance with the following rules:

1. Real property transferred through succession or donation to the heir or donee who is not
engaged in the real estate business with respect to the real property inherited or donated,
and who does not subsequently use such property in trade or business, shall be considered
as a capital asset in the hands of the heir or donee.
2. Real property received as dividend by the stockholders who are not engaged in the real estate
business and who do not subsequently use such property in trade or business, shall be
considered as a capital asset in the hands of the recipients even if the corporation which
declared the real property dividends is engaged in real estate business.
3. The real property received in an exchange shall be treated as ordinary asset in the hands of
the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer
who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate
business, will use in business the property received in exchange.

g) In the case of involuntary transfers of real properties, including expropriations or foreclosure sale,
the involuntariness of such sale shall have no effect on the classification of such real property in the
hands of the involuntary seller, either as capital asset or ordinary asset as the case may be.

4. h) Real properties acquired by banks through foreclosure sales are considered as their ordinary assets.
However, banks shall not be considered as habitually engaged in the real estate business
EXERCISES:
Realty dealer Stock IND IND in Employee
Developer/lessor Dealer Engaged practice of
in trade profession
Land under name of
taxpayer not used in
business (idle)
Land - collects parking fees
Office building
Home Furniture
House and lot (family
home)
Service vehicle
Personal car
 Personal computer
Office equipment
Shares of stock in DC
Net capital gain The excess of capital gain over capital loss
Net capital loss The excess of capital loss over capital gain
Limitation on deduction Capital losses shall be allowed only to the extent of capital gains
of capital losses
Holding period 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.
Holding period DOES NOT 1. Corporate taxpayers
apply to: 2. Ordinary assets
3. Real properties classified as capital asset
4. Shares of stocks not listed in the Stock Exchange

Rule on Holding Period Individual Taxpayers Non-Individual Taxpayers

a. Short term capital gain or
loss (capital asset has
been held for not more 100% 100%
than 12 months)
b. Long term capital gain or
loss (capital asset has
been held for more than 50% 100%
12 months)
EXERCISES:
1. Nicanor sold the following properties in 2019:
Properties Sold Date Acquired Date Sold Gain (Loss)
Motor vehicle 7-14-2017 1-14-2019 200,000
Office printer 7-1-2018 1-5-2019 40,000
Personal Mac Laptop 2-14-2018 2-14-2019 160,000
Home Television 6-21-2018 7-24-2019 (20,000)
Personal books 11-30-2018 1-31-2019 (10,000)
Idle land 3-1-2018 1-2-2019 2,500,000
The net capital gain or loss shall be computed as follows:
Properties Sold Holding Period % Gain (Loss)
Motor vehicle Long-term 50% 100,000
Office printer N/A
Personal Mac Laptop Long-term 50% 80,000
Home Television Long-term 50% (10,000)
Personal books Short-term 100% (10,000)
Idle land N/A
NET CAPITAL LOSS CARRY Net capital loss is carried over to the succeeding year and shall be
OVER deemed as a short-term loss i.e. as if held for not more than 12
months.

Amount to be carried over is up to the extent of capital gain

EXERCISES:
Nicanor has made available the following information:
2015 2016 2017 2018 2019
Net capital gain (loss) (3,000) 2,000 1,000 (1,000) 2,000

Reportable income
DETERMINATION OF AMOUNT AND RECOGNITION OF GAIN OR LOSS
(A) Computation of Gain or Loss. – The gain from the sale or other disposition of property shall be the
excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the
loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The
amount realized from the sale or other disposition of property shall be the sum of money received plus
the fair market value of the property (other than money) received.

(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. – the basis of property shall
be:
1. Purchase - Acquisition cost
2. Inheritance - Fair market price or value as of the date of acquisition
3. Gift/Donation – shall be the same as if it would be in the hands of the donor OR the last preceding
owner by whom it was not acquired by gift, except that if such basis is greater than the fair market
value of the property at the time of the gift then, for purposes of determining loss, the basis shall be
such fair market value
4. Acquired for less than an adequate consideration in money or money’s worth – amount paid by
the transferee for the property

Exercises: Compute the Gain or Loss

1. Acquired by purchase: Nicanor bought a car amounting to Php 1,000,000.00. He sold the same for
Php 100,000.
2. Nicanor inherited a car valued at the time of inheritance Php 1 Million. Currently, the market value
is appraised at Php 3 Million. He sold the car for Php 5 Milllion.
3. Nicanor received a laptop valued at Php 100,000.00 by way of donation from JV. JV purchased the
laptop at Php 120,000.00. Nicanor sold the property at Php 150,000.00.
4. Nicanor purchased a watch for only Php 100,000.00 where the fair market value of which is Php
500,000.00. He sold the property for Php 1,000,000.00
1 2 3 4
Selling price
COST
Gain (Loss)

NOTES:
1. If a problem stated date of acquisition, and date of disposition, holding period is implied.
2. General Rule: If FMV is higher than Selling Price, there is implied donation. Exception, if
it is made in the ordinary course of business (TRAIN Law).

SHARES OF STOCKS NOT TRADED IN STOCK EXCHANGE

Capital gains tax - Final tax rate of 15% for net capital gains realized during the taxable year from
the sale, barter, exchange or other disposition of shares of stock in a domestic corporation not
traded through the stock exchange.

Formula:
Selling Price xxx
Cost xxx
Net Capital Gain xxx
CGT rate 15%
Capital gains tax xxx
DETERMINATION OF AMOUNT AND RECOGNITION OF GAIN OR LOSS FOR UNLISTED SHARES
1. Determination of Selling Price. —In determining the selling price, the following rules shall apply:
a. In the case of cash sale, the selling price shall be the total consideration per deed
of sale.
b. If the total consideration of the sale or disposition consists partly in money and
partly in kind, the selling price shall be sum of money and the fair market value of
the property received.
c. In the case of exchange, the selling price shall be the fair market value of the
property received.
d. In case the fair market value of the shares of stock sold, bartered, or exchanged is
greater than the amount of money and/or fair market value of the property
received, the excess of the fair market value of the shares of stock sold, bartered
or exchanged over the amount of money and the fair market value of the property,
if any, received as consideration shall be deemed a gift subject to the donor’s tax
 under Sec. 100 of the Tax Code, as amended unless it is a bona fide sale, at arms-
length and with no donative intent (TRAIN Law).

2. Definition of COST (see above)

3. Definition of “fair market value” of the Shares of Stock. —For purposes of this Section, “fair
market value” of the share of stock sold shall be:
(3.1) In the case of listed shares which were sold, transferred, or exchanged outside of the trading
system and/or facilities of the Local Stock Exchange, the closing price on the day when the shares
are sold, transferred, or exchanged. When no sale is made in the Local Stock Exchange on the day
when the listed shares are sold, transferred, or exchanged, the closing price on the day nearest to
the date of sale, transfer or exchange of the shares shall be the fair market value.

(3.2) In the case of shares of stock not listed and traded in the local stock exchanges, the value of
the shares of stock at the time of sale shall be the fair market value.

Note: Adjusted Net Asset Method no longer applies under Revenue Regulations No. 20-2020.

(3.3) In the case of shares of stock not listed and traded in the local stock exchanges, the following rules
shall apply (Revenue Regulations No. 20-2020):

1. For common shares of stock, the book value based on the latest financial statements duly certified by
an independent public accountant prior to date of sale, but not earlier than the immediately preceding
taxable year, shall be considered as the prima facie fair market value.

2. For preferred shares of stock, the liquidation value which is equal to the redemption price of the
preferred shares as of the balance sheet date nearest to the transaction date, including any premium and
cumulative preferred dividends in arrears shall be considered as fair market value.

3. In case there are both common and preferred shares, the book value per common shares is computed
by deducting the liquidation value of the preferred shares from the total equity of the corporation and
dividing the result by the number of outstanding common shares as of balance sheet date nearest to the
transaction date.

Illustration: Assume that Nicanor sold 10,000 shares in ABC Corporation on June 30, 2020. The
corporation’s accounting period is on calendar year basis. In this case, the book value as the fair market
value of the shares of stock in ABC Corporation shall be determined based on its audited financial
statements for the year ending December 31, 2019 since the audited financial statements for taxable year
2020 is not yet existent as of the date of the sale of shares.

Assume further that based on the audited financial statements as of December 31, 2019 the total assets
of ABC Corporation are Php 5Million while its liabilities are Php 2Million resulting to an equity of Php
3Million. Its outstanding shares are 20,000. For this purpose, the net book value as the fair market value
of each share call be computed as follows:

Php 3Million (equity)

20,000 (outstanding shares)

= Php 150 ( net book value per share)

In this case, the net book value of the shares of stock in ABC Corporation based on its latest audited
financial services shall be Php 150 per share. As such, the fair market value of the shares of stocks in ABC
Corporation shall be Php 150 per share.
4. For this purpose, the book value of the common shares of stock or the liquidation value of the preferred
shares of stock, need not be adjusted to include any appraisal surplus from any property of the corporation
not reflected or included in the latest audited financial statements shall be sufficient in determining the
fair market value of the shares of stock subject of the sale, barter, exchange or other disposition.

Exercises: Compute the Capital Gains Tax

1. Acquired by purchase: Nicanor bought shares of stock of a DC amounting to Php 1,000,000.00 at
its par value. He sold the same for Php 100,000.
2. Nicanor inherited shares of stocks from a DC valued at the time of inheritance Php 1 Million
representing its par value. Currently, the market value is appraised at Php 3 Million. He sold the
shares of stocks for Php 5 Million.
3. Nicanor received shares of stocks from a DC valued at Php 100,000.00 representing its par value
by way of donation from Zac. Zac purchased the shares of stocks at Php 120,000.00. Nicanor sold
the shares of stocks at Php 150,000.00.
4. Nicanor purchased shares of stocks for only Php 100,000.00 representing its par value where the
fair market value of which is Php 500,000.00. He sold the same for Php 1,100,000.00
1 2 3 4
Selling price
COST
Capital Gain
(Loss)
Capital gains tax
DST

NOTE: Sale of shares of stock is subject to documentary stamp tax (DST):

Rates:
1. With PAR VALUE: One peso and Fifty centavos (P1.50) on each Two hundred pesos (P200), or fractional
part thereof of the par value of such stock.
2. Without PAR VALUE: Fifty percent of the documentary stamp tax paid upon the original issue of said
stock

EXEMPT TRANSACTIONS:
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
SALE OF REAL PROPERTY CLASSIFIED AS CAPITAL ASSET
Capital gains tax – 6%
The value of the real property will be based on the selling price, fair market value as determined by the
Commissioner (zonal value) or the fair market value as shown in the schedule of values of the 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, the FMV per latest tax declaration at the time of the sale or disposition, duly
certified by the City/Municipal Assessor shall be used.

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 (P 15.00)
Illustration: In 2018, Goyo purchased a house and lot in the amount of Php 2,500,000.00. The 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. Goyo
sold the same property in 2019 in the amount of Php 4,000,000.00. Compute the tax if the property is
capital and ordinary asset:

Sale of real property classified as capital asset Sale of real property classified as ordinary asset

CGT CWT
DST DST

TAXATION OF SALE OF REAL PROPERTY CLASSIFIED AS CAPITAL ASSET WHEN THE BUYER IS THE
GOVERNMENT - The individual taxpayer has an option to report the transaction as CGT or under normal
income tax if the buyer is the government, political subdivision, agency or instrumentality, government-
owned or controlled corporation.

Illustration: In 2018, Goyo purchased a house and lot in the amount of Php 2,500,000.00. The 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,
representation expenses and notarial fees. Compute the tax savings if Goyo will opt or normal tax.
Capital Gains Tax Normal Income Tax

DST (based on GSP if sale to gov’t) DST (based on GSP if sale to gov’t)

Note: If buyer is government, the DST is based on consideration. If other party is exempt, the party NOT
exempted is the one liable.

SALE OF PRINCIPAL RESIDENCE –

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 duly 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

PROCESS OF AVAILING EXEMPTION IN CASE OF SALE/TRANSFER OF PRINCIPAL RESIDENCE

1. Buyer/Transferee shall withhold from the seller and shall deduct from the agreed selling
price/consideration the 6% capital gains tax
2. The CGT shall be deposited in cash or manager’s check in interest-bearing account with an
Authorized Agent Bank (AAB) under an Escrow Agreement between the concerned Revenue
District Officer, the Seller and the Transferee, and the AAB
3. The escrow deposit including its interest yield, shall only be released to such Transferor upon
certification by the said RDO that the proceeds of the sale/disposition thereof has, in fact, been
utilized in the acquisition or construction of the Seller/Transferor’s new principal residence within
eighteen (18) calendar months from date of the said sale or disposition. The date of sale or
disposition of a property refers to the date of notarization of the document evidencing the
transfer of said property.

• In general, the term “Escrow” means a scroll, writing or deed, delivered by the grantor, promisor
or obligor into the hands of a third person, to be held by the latter until the happening of a
contingency or performance of a condition, and then by him delivered to the grantee, promise or
obligee.

Scenario 1 – Full utilization of proceeds from the sale. –

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 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 7,000,000.00.

Historical cost of old principal residence 1,000,000

Gross selling price 4,000,000
FMV of old principal residence 5,000,000
Cost to acquire new principal residence 7,000,000

Compute the capital gains tax:

Solution:
The transaction is exempt from the CGT since the entire proceeds of the sale has been fully utilized to
acquire his new principal residence.

How to compute:
• The historical cost or the adjusted cost basis of the OLD principal residence which shall be carried
over to the cost basis of the NEW principal residence is as follows:

Historical cost of OLD 1,000,000

Add: Additional cost to acquire NEW:
Cost to acquire NEW 7,000,000
Less: GSP of OLD 4,000,000 3,000,000
ADJUSTED COST BASIS OF NEW PR 4,000,000

Scenario 2- Partial utilization of proceeds from the sale. –

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 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 3,000,000.00.

Historical cost of old principal residence 1,000,000

Gross selling price 4,000,000
FMV of old principal residence 5,000,000
Cost to acquire new principal residence 3,000,000

Using the formula below, the capital gains tax shall be computed in the manner hereunder indicated
(MEMORIZE):

Unutilized portion of GSP x GSP or FMV of old x CGT rate

GSP of OLD PR whichever is higher (6%)

CGT is 4,000,000-3,000,000 x 5,000,000 x 6% =75,000

4,000,000

In this case, Nicanor is exempt from the CGT to the extent allocable to that portion which he actually
utilized to acquire his NEW principal residence.

Since the proceeds was not entirely utilized to acquire NEW principal residence, the cost basis to be carried
over to the NEW principal residence shall be equivalent to the proportion of the utilized amount over the
GSP applied on the historical cost as follows:

Historical cost of old principal residence 1,000,000

Less: portion of historical cost pertaining to the tax paid for unutilized amt.
(1,000,000 unutilized / 4,000,000 GSP)
(1M/4M = 25% x 1,000,000) 250,000
Adjusted cost basis of NEW PR 750,000

EXEMPT TRANSACTIONS:

1. A government entity or government-owned or controlled corporation selling real property

2. If the disposition of the real property is gratuitous in nature
3. Where the disposition is pursuant to the CARP law

Electronic-Certificate Authorizing Registration (e-CAR)

- is a certification issued by the Commissioner or his duly authorized representative attesting that the
transfer has been reported and the taxes have been fully paid.

e-CARs 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)

Validity of e-CAR – Five years from date of issuance.

ADMINISTRATIVE FORM PERSON LIABLE PLACE OF DEADLINE

REQUIREMENTS FILING
Sale of Shares of Stocks not 1707 G.R. Seller Where seller is 30 days after
listed in Stock Exchange Exc. Buyer registered sale or
(CGT) disposition
Sale of Real Property 1706 G.R. Seller Where property
Classified as Capital Asset Exc. Buyer is located
(CGT)
th
Sale of Real Property 1606 G.R. Seller Where property
10 day
Classified as Ordinary Asset Exc. Buyer is located
following the
(CWT)
month of
transaction
Documentary stamp tax 2000- By agreement. If Where the CGT 5th day following
OT no agreement, is paid the month of
buyer sale (notary)

END