DEALINGS IN PROPERTIES

• Dealings in properties involve the sale, exchange and other

disposition of properties such as ordinary asset or capital asset.

• Ordinary assets – assets used in the business of the taxpayer such

as inventories, supplies and property, plant and equipment.
• Capital assets – assets other than ordinary assets.
Determination of Gains or Losses in Dealings in Properties
Selling price P xxx
Less: Tax basis or adjusted basis of the asset disposed xxx
Gain or loss P xxx

What is selling price?

Selling price includes the amount realized from the sale and other disposition of
property which shall include:
1. The sum of money received and
2. Fair value of non-cash properties received
What is tax basis?
Tax basis refers to the cost, carrying amount or depreciated cost of an asset.
Tax Treatment of Ordinary Gains and Losses
• Ordinary gains – are separate items of gross income subject to regular
income tax. These are taxable in full.
• Ordinary losses – are items of deductions from gross income in the
determination of net income from business or profession. These are
deductible in full.
Tax Treatment of Capital Gains and Losses
• Under the NRIC, capital losses are deductible only up to the extent of
capital gains from dealings in capital assets other than domestic
stocks and real properties. Hence capital gains and capital losses are
offset.
Determination of net capital gain or net capital loss

For individual taxpayers:

The holding period rule
If the capital asset is held by an individual taxpayer for a period of:
1. not more than one year ( short-term holding period) – 100% of the
capital gain or loss is recognized
2. more than one year (long-term holding period) – 50% of the capital
gain or loss is recognized
For Corporate taxpayers:
• Regardless of the length of the holding period, 100% of the capital
gain or capital loss is recognized. The holding period rule does not
apply to corporations.

Individual taxpayers are subject to progressive tax where higher

income is subject to higher tax and lower income to lower tax.
Corporate taxpayers are subject to proportional tax wherein the same
income tax rate applies regardless of the level of income.
Effects of Situs on dealings in Properties

• If the taxpayer is taxable on world income such as in the case of

resident citizens and domestic corporations, the rules of dealings in
properties apply to all properties regardless of location. However, if
the taxpayer is taxable only on Philippine income, the rules of
dealings in properties will be applied only to properties located in the
Philippines.
SPECIAL RULES IN THE DETERMINATION OF TAX BASIS
A. For assets acquired by purchase, the tax basis is the:
1. Acquisition cost, for:
• capital assets
• non-depreciable ordinary assets such as land
• any asset purchased for an inadequate consideration or those acquired a
less than their fair value at the date of acquisition
2. Depreciated cost, for depreciable ordinary assets

B. Other assets received by exchange, fair value of asset received

SPECIAL RULES IN THE DETERMINATION OF
TAX BASIS
C. For assets received by way of gratuitous title:
1. Donation – whichever is lower of:
a.) the tax basis on the hand of the donor or the last preceding owner by
home it was not acquired by donation or
b.) fair market value at the date of gift
If the basis is greater than the market value of the property at the time of
donation, then for purposes of determining the loss, the basis shall be such
market value.
2. Inheritance – fair value of the property on the date of death of the
decedent
SPECIAL RULES IN THE DETERMINATION OF
TAX BASIS
D. For shares received by way of tax-free exchanges
a. For pure share-for-share swap, the tax basis of the shares exchanged
or given is the tax basis of the shares received
b. For share-swap with non-cash consideration, the tax basis shall be
the substituted basis computed as follows:
Transferor
Tax basis of shares exchanged P xxx
Add: Gain recognized xxx
Amounts treated as dividend of shareholder xxx
Less: Cash and fair value of other properties received xxx
Tax basis of new shares received by the transferor P xxx
SPECIAL RULES IN THE DETERMINATION OF
TAX BASIS
Boot – the money received and other property received in excess of the
stocks or securities received by the transferor on a tax free exchange.
Properties received as ‘boot’ shall have the same basis as their fair
market value.
Transferee
Original basis in the hands of the transferor P xxx
Add: gain recognized to transferor xxx
Tax basis of the shares received by the transferee xxx
WASH SALES
The wash sales rule discussed under Capital gains taxation also apply to
the regular income tax particularly to sale by non-dealers of securities
of:
a. Foreign shares
b. Debt securities, or foreign or domestic
• Wash sales occur when within 30 days before and 30 days after the
date of disposal of securities at a loss, known as the “61-day period”,
the taxpayer acquired or entered into a contract or option to acquire
substantially identical securities.
• The gains from wash sales transaction are taxable but the losses are
not deductible. The wash sales rule is not applicable to dealers in
securities.
TRANSACTIONS CONSIDERED EXCHANGES
The following are therefor subject the rules of dealings in properties:
1.) Retirement of bonds, debentures, notes, or certificates and other
evidence of indebtedness
2.) Short sale of properties
3.) Failure to exercise a privilege or option to buy or sell property that is
a capital asset
• TRANSACTIONS CONSIDERED EXCHANGES
4.) Security becoming worthless
5.) Receipt of liquidating dividends
6.) The amount received in liquidation of a partnership is also deemed
in exchange of the partner’s interest on the partnership
7.) Redemption of shares for cancellation or retirement
8.) Voluntary buy-back of shares