GAINS AND LOSSES FROM DEALINGS IN

PROPERTIES
Classification of Taxpayer's Properties (Banggawan, 2019)

1. Ordinary assets - assets used in business, such as.

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
b. Real property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business
c. Real property used in trade or business of a character which is subject to the
allowance for depreciation
d. Real property used in trade or business of the taxpayer

Business is habitual engagement in a commercial activity involving the regular sale of goods or
services for a profit. Non-profit entities are not businesses.

Basically, ordinary assets are:

a. Assets held for sale - such as inventory
b. Assets held for use - such as supplies and items of property plant and equipment like buildings,
property improvements, and equipment
2. Capital assets - any asset other than ordinary assets

Basically, capital assets are:

1. Personal (non-business) - assets of individual taxpayers

2. Business assets of any taxpayer which are:
a. Financial assets such as cash, receivables, prepaid
expenses and investments
b. Intangible assets such as patent, copyrights, leasehold
rights. franchise rights
Asset classification is relative

The classification of assets or properties as ordinary asset or capital

asset does not depend upon the nature of the property but upon the
nature of the taxpayers business and its usage by the business.

Example:

A domestic stock is an ordinary asset to a dealer in securities but is a

capital asset to a non-security dealer.

A "dealer in securities" is a merchant of stocks or securities with a

registered place of business, regularly engaged in the purchase of
securities and their re-sale to customers.
Corporations

Where the taxpayer is a corporation, the following rules as to recognition of

capital gains or losses from the disposition of property classified as capital
asset shall apply:

1. The holding period does not apply to corporations. Hence, capital gains
and losses are recognized 100%;

2. Capital losses are deductible only to the extent of capital gains;

3. Ordinary losses are deductible from capital gains but net capital loss
cannot be deducted from ordinary gain; and

4. Net capital loss carry over is not applicable.

Individuals
Where the taxpayer is an individual, the following rules as to recognition of capital gains or losses from the
disposition of personal property classified as capital asset shall apply:

1. Depending on the holding period, the percentages of gain or loss to be taken into
account follows:
• 100% if the capital asset has been held for 12 months or less; and
• 50% if the capital assets has been held for more than 12 months.

2. Capital losses are deductible only to the extent of the capital gains; hence, a net
capital loss is not deductible.
3. Ordinary losses are deductible from capital gains but the net capital loss cannot be
deducted from ordinary gain; and
4. “Net capital loss carry over”, is recognized on the following conditions:
• Net capital loss in a taxable year does not exceed the net income before
exemption for such year.
• Such net capital loss may be deducted from the net capital gains of the next
taxable year.
Rationale of the second limit: Net capital gain in the following year The amount of capital loss carry-over shall
not exceed the net capital gain in the following year. Allowing capital loss carry-over in excess of the net capital
gain in the following year will create another net capital loss in the following year which will breach the one-year
carry-over rule under the NIRC
The flowchart above will guide you on the tax treatments assuming there is no net capital loss
sustained from previous years.
Capital Gains Subject to Capital Gains Tax
(Ballada, 2019)

There are only two types of capital gains subject to capital gains tax:

1. Capital gains on the sale real properties not used in business.

2. Capital gains on the sale of domestic stocks sold directly to buyer.

SCOPE OF CAPITAL GAINS TAXATION

Gains on Dealings in Capital Assets Tax rates

Gain on sale, exchange and other disposition of real 6% Capital gains tax
property in the Philippines

Gain on sale, exchange and other disposition of 15% capital gains tax
domestic stocks directly to buyers

Gain from other capital assets Regular income tax

NATURE OF THE 6% CAPITAL GAINS TAX
a. Presumption of capital gains

The 6% capital gains tax applies even if the sale transaction resulted to a loss. Gain is always presumed to
exist. The basis of taxation is the selling price or fair value whichever is higher, not the actual gain.

b. Non-consideration to the involuntariness of the sale

The capital gains tax applies even if the sale is involuntary or is forced by circumstances such as in the case of
expropriation sale, foreclosure dispositions by judicial order, and other forms of forced disposition, it also
applies to conditional sales and pacto de retro sales

c. Final tax

The capital gains tax shall be withheld by the buyer against the selling price of the seller and remit the same to
the government.
Capital Gains Tax on Disposition of Real Property
(Ballada, 2019)

Sales, exchanges or other dispositions of real property classified

as capital assets, including pacto de retro sales, and other forms of
conditional sale, by individuals, including estates and trusts,
shall be taxed at the rate of 6% based on the gross selling price
or current fair market value as determined by the
Commissioner, whichever is higher.
In the case of a domestic corporation, the capital gains tax is imposed where the
transactions involves the sale, exchange , or disposition of lands and/or building
which are not actually used in the corporate business and are treated as capital
assets. The 6% gains tax on the sale of a capital asset is a final tax and is imposed on
each sale or disposition. Thus, the corporation seller of the property need not report the
income from the sale when it files its annual income tax return for the year concerned.

The amount realized from the sale or other disposition of real property shall be any
money received plus the fair market value of the property (if other than money) received
by the taxpayer-seller, interest included in installment payments shall not form part of the
amount realized but shall be treated as ordinary income taxable under section 24 of the
Code.

Non-stock, non-profit organization are subject to capital gains tax on its disposition of
real property (BIR Ruling 23-2010, Aug. 4, 2010; RMC 7-2012, Feb. 23, 2012).
Tax Base
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 value of improvement is the construction cost per

building permit and or occupancy permit plus 10% per year, after year of construction, or
the market value of the property exchanged.

In the case of foreclosure sale, tax base is the selling price per Sheriff’s Certificate of
Sale or the bid price in the Contract to Sell. In a taxable exchange, the taxable base is
the fair market value of the property exchanged.
Tax Rate and Tax Due

The rate of capital gains tax for disposition of real property is 6%

Illustration: Ms. Mendoza, a resident citizen, sold her residential house and lot located in the Philippines
for P6,000,000. Three years ago, she bought the house for P4,000,000. It now has a fair market value of
P5,500,000. How much is the capital gains tax?

Selling price (higher than FMV) P 6,000,000

Multiply by 6%
Tax due P 360,000

The capital gains shall not be included in the gross income for purposes of computing the taxpayer-seller
income tax liability under Sections 24(A) and 27(A). However, an individual taxpayer may elect to
declare gains realized from a sale or disposition of real property to the government (or any of its political
subdivision or agencies or to government-owned or controlled corporations) under Section 24(A). In all
these cases, the sale or disposition shall be subject to withholding prescribed under Revenue Regulations
2-1998, as amended.
Persons Subject to Capital Gains Tax
1. Individuals
2. Domestic corporations

The transfer of title by the trustee in favor of the trustor, who is the beneficial owner thereof, is not
subject to CGT under Section 27(D)(5) of the Tax Code, or to CWT under R.R. 2-98, as amended,
because the conveyance is not motivated by valuable consideration and merely acknowledges,
confirms and consolidates the legal title and beneficial ownership over the property in the name of the
trustor (BIR Ruling 329-2012, May 1, 2012).

Sale by a Natural Person of Principal Residence

When a citizen or resident alien disposes of his principal residence, he is exempt from the
payment of the capital gains tax due on the sale on certain conditions. Revenue Regulations 14-
2000 laid down the requirements for exemption from capital gains tax on sale, exchange or disposition
of principal residence.
Capital Gains and Losses on Stock Transactions
(Ballada, 2019)

Stocks issued by a domestic corporation may either be traded in the local stock
exchange (through PSE) or directly to buyer.

TAX ON SALE OF DOMESTIC STOCKS THROUGH THE PSE

The sale of domestic stocks classified as capital assets through the PSE is not
subject to capital gains tax. It is subject to a stock transaction tax of 60% of 1%
of the selling price effective January 1, 2018. The old law imposed a rate of
50% of 1 % on the selling price.
Illustration 1: Non-dealer in stocks

Mr. San Juan, not a dealer in stocks, sold the following stock investments through the Philippine Stock
Exchange:

Date Stock Code Selling Price Cost Gain(loss)

4/5/2020 AC 4,000,000 3,700,000 300,000
4/5/2020 SMB 3,000,000 3,200,000 -200,000
Total 7,000,000 6,900,000 100,000

The stock transaction tax shall be computed as follows:

Total selling prices of the stock through PSE 7,000,000

Transaction tax rate 0.6%
Transaction tax 42,000
CAPITAL GAINS TAX ON SALE, EXCHANGE, AND OTHER
DISPOSITIONS OF DOMESTIC STOCK DIRECTLY TO BUYER

Nature of the CGT:

1. Universal tax

It applies to all taxpayers disposing stocks classified as capital assets regardless of

classification of the taxpayer. By situs, the gain on sale of domestic stocks is
within. The tax applies even if the sale is executed outside the Philippines.

2. Annual tax

It is imposed on the annual net gain on the sale of domestic stocks directly to
buyer.
Selling Price xxx,xxx
Less:
Basis of stocks disposed xxx,xxx
Selling Expenses xxx,xxx
Documentary Stamp tax on the sale xxx,xxx xxx,xxx
Net Capital gain(loss) xxx,xxx

Selling Price shall mean:

 In case of cash sale, the total consideration received per deed of sale
 If total consideration is paid partly in money and partly in property, the
sum of money and fair value of property received
 In case of exchanges, the fair value of the property received
Returns and Payment of Capital Gains Tax
The return is to be filed within 30 days after each sale or disposition of shares of stocks
or real property. In case of installment sale, the return shall be filed within 30 days
following the receipt of the first down payment and within 30 days following the
subsequent installment payments. Only one return shall be filed for multiple
transactions with the day.

A final consolidated return or an adjustment return covering all the stock transactions
during the taxable year shall be filed on or before April 15 of the following taxable
year. The tax shown on the final or adjustment return after deducting the taxes paid
during the first three (3) quarters of the same taxable year shall be paid upon filing or
shall be refunded, as the case may be.

The reckoning date for the payment of CGT on the sale, exchange or other disposition
of real property classified as capital assets is the date on notarization of the transfer
document (BIR Ruling No. DA (C-027) 112-2010, June 25, 2010).
Certificate Authorizing Registration
Certificate Authorizing Registration (CAR) is a certification issued by the Commissioner or his
duly authorized representative attesting that the transfer and conveyance of land
buildings/improvements or shares of stock arising from sale, barter or exchange have been
reported and the taxes due inclusive of the DST, have been fully paid.

In order to transfer ownership of shares of stock not traded in the stock exchange, it is necessary
to secure a CAR pursuant to Revenue Memorandum Order 15-2003. The receipts of payment of
the tax should also be filed and recorded by the secretary of the corporation pursuant to Section
11 of RR 6-2008 (Revenue Memorandum Circular 37-2012, Aug. 3, 2012).

CARs are issued by the RDO of the BIR district having jurisdiction over the place where the
property being transferred is located (BIR Ruling 26-2012, Jan. 12, 2012).