CHAPTER 3

Assignment
EXERCISE DRILL 1
EXERCISE DRILL 2
EXERCISE DRILL 3
EXERCISE DRILL 4
EXERCISE DRILL 5
EXERCISE 6
Accounting method #5-6

Dapitan.Inc has the following receipts during 2023:

From service billings to clients. P 400,000

Advances from clients. 100,000
Total Cash collection. 500,000

The P100,000 advances refer to services which will be rendered next year. Total
uncollected billing increased from P100,000 on December 31,2022 to P150,000 on
December 31,2023

5. Compute the gross income using cash basis

6. Compute the gross income using accrual basis
Dapitan.Inc has the following receipts during 2023:

From service billings to clients. P 400,000

Advances from clients. 100,000
Total Cash collection. 500,000

The P100,000 advances refer to services which will be rendered next year. Total uncollected
billing increased from P100,000 on December 31,2022 to P150,000 on December 31,2023

5. GROSS INCOME FOR THE YR 2023 USING CASH BASIS

FROM SERVICE BILLINGS TO CLIENTS P400,000

ADVANCES FROM CLIENTS. 100,000
TOTAL CASH COLLECTIONS. 500,000 (C)
Dapitan.Inc has the following receipts during 2023:

From service billings to clients. P 400,000

Advances from clients. 100,000
Total Cash collection. 500,000

The P100,000 advances refer to services which will be rendered next year. Total uncollected billing increased
from P100,000 on December 31,2022 to P150,000 on December 31,2023

6. Compute the gross income using accrual basis

From service billings to clients P400,000

+ Advances from clients 100,000

Total cash collections. 500,000
+ Accrued income reported in 2023. 50,000
(150,000 total uncollected billing on 2023 – 100,000 accrued income reported in 2022)
Gross income using accrual basis. 550,000 (d)
CHAPTER 4- ACCOUNTING PERIODS AND
ACCOUNTING METHODS QUIZ
TRUE OR FALSE 1

1. T
2. F(only passive income do not require direct participation of the taxpayer in earning the income)
3. T
4. F(Mutually exclusive)
5. T
6. T
7. F(capital assets)
8. T (ordinary asset and capital asset)
9. T
10. T
11. T
12. F ( individual taxpayers can only use calendar period thus they cannot change from calendar to fiscal period.)
13. T
14. F (Not Dec 31, day of death)
15. T
Jenny offers cleaning services to her clients. Here are her current transactions from her customers:
Customers:
• T1. Christine - Jenny already performed the services on Dec 1, 2023, but will receive payment on Jan 5,
2024, for 10,000.
• T2. Roberto - Jenny will perform her services and receive payment on Jan 7, 2024, for 15,000.
• T3. Mario - Jenny received advance payment on June 29, 2023, and will perform her services on Feb 1,
2024, for 20,000.
• T4. Lian - Lian paid Jenny on January 8, 2023, for the services that Jenny performed on Feb 3, 2022, for
25,000.

For the taxable yr 2023, What is the taxable income recognized by Jenny in the 2023 income tax return

Scenario 1: assuming Jenny uses calendar period and accrual basis

Scenario 2: assuming Jenny uses fiscal period ending june 30, 2023 and accrual basis
Scenario 3: assuming Jenny uses calendar yr and cash basis
PROBLEM
Jenny offers cleaning services to her clients. Scenario 1: assuming Jenny uses calendar period and accrual basis
Here are her current transactions from her
customers: Jenny uses calendar period, so she will recognize income from jan 1-
Customers: dec 31 for the taxable yr 2023. Since accrual basis, Jenny will
recognize cash income received in the calendar period + income
• T1. Christine - Jenny already performed the earned regardless when received.
services on Dec 1, 2023, but will receive
payment on Jan 5, 2024, for 10,000.
T1: accrued income P 10,000 ✅ income recognized in the taxable yr
• T2. Roberto - Jenny will perform her 2023 because earned within jan 1- dec 31, 2023 coverage.
services and receive payment on Jan 7, 2024, T2: P 15,000 ❌ income not recognize in the taxable yr 2023 since
for 15,000.
not earned or received within Jan 1- Dec 31, 2023 coverage.
• T3. Mario - Jenny received advance payment Taxable yr 2024 na irecognize.
on June 29, 2023, and will perform her T3: Advance income of P 20,000 ✅ income since received within
services on Feb 1, 2024, for 20,000. jan -1 - dec 31 2023 coverage
• T4. Lian - Lian paid Jenny on January 8, T4: income collected on January 8, 2023, accrued on Feb 3, 2022
2023, for the services that Jenny performed 25,000 ❌ not recognized in 2023 the income collected since it was
on Feb 3, 2022, for 25,000. already recognized on Feb 3,2022 when Jenny performed the
services, it was already filed and recorded as accrued income on
For the taxable yr 2023, What is the taxable the 2022 income tax return so no longer included in the 2023
income recognized by Jenny in the 2023 ITR because it will result to double taxation.
income tax return
SCENARIO 1 ANSWER: P 30,000
Jenny offers cleaning services to her
clients. Here are her current transactions
from her customers:
Customers:
• T1. Christine - Jenny already
performed the services on Dec 1,
2023, but will receive payment on Jan
5, 2024, for 10,000.
• T2. Roberto - Jenny will perform her
services and receive payment on Jan
7, 2024, for 15,000.
• T3. Mario - Jenny received advance
payment on June 29, 2023, and will
perform her services on Feb 1, 2024,
for 20,000.
• T4. Lian - Lian paid Jenny on January
8, 2023, for the services that Jenny
performed on Feb 3, 2022, for 25,000.
For the taxable yr 2023, What is the
taxable income recognized by Jenny in
the 2023 income tax return
Scenario 2: Assuming Jenny uses fiscal period ending june 30, 2023 and accrual basis
Jenny is an individual taxpayer so fiscal period is not allowed (pg. 103 Banggawan
book) So the answer is not applicable.
assuming Jenny is a corporate taxpayer
Since Jenny uses fiscal period ending June 30,2023 and applies accrual basis, she will
recognize income received and income earned regardless when received from July
1,2022 until end of the fiscal yr June 30,2023 for the taxable yr 2023.
T1: income of P 10,000❌ The accrued income of P 10,000 earned on December 1,
2023, is not recognized in the taxable year 2023 because it was not earned within
the July 1, 2022, to June 30, 2023, timeframe. This income will be recorded in the
taxable year 2024 as it falls within the July 1, 2023, to June 30, 2024 coverage.
T2: P 15,000 ❌ not recognize in the taxable yr 2023 since not earned or received
within july 1, 2022 - june 30, 2023 timeframe
T3: Advance income of 20,000 ✅ received on June 29,2023, recognize as income
since received within july 1, 2022- June 30, 2023 timeframe.
T4: income collected on 2023, accrued on 2022 ❌ not recorded as income on taxable
yr 2023, since already recorded as accrued income on taxable yr 2022 ( july 1, 2021-
june 30, 2022)
Jenny offers cleaning services to her clients.
Here are her current transactions from her
customers:
Customers:
• T1. Christine - Jenny already performed
the services on Dec 1, 2023, but will
receive payment on Jan 5, 2024, for
10,000.
• T2. Roberto - Jenny will perform her
services and receive payment on Jan 7,
2024, for 15,000.
• T3. Mario - Jenny received advance
payment on June 29, 2023, and will
perform her services on Feb 1, 2024, for
20,000.
• T4. Lian - Lian paid Jenny on January 8,
2023, for the services that Jenny
performed on Feb 3, 2022, for 25,000.
For the taxable yr 2023, What is the taxable
income recognized by Jenny in the 2023
income tax return
Scenario 3: assuming Jenny uses calendar yr and cash basis
Jenny uses calendar period, so she will recognize income from jan 1-
dec 31 for the taxable yr 2023. Since cash basis, Jenny will recognize
income received in cash whether earned or unearned.
T1: 10,000 ❌ not recorded as income for the taxable yr 2023 because
not received within the Jan 1 – Dec 31,2023 timeframe.
T2: 15,000 ❌ not recorded as income for the taxable yr 2023 because
not received within the Jan 1 – Dec 31,2023 timeframe.
T3: advance income of 20,000 received on January 8,2023✅ recorded
as income for the taxable yr 2023 because received within the Jan 1-
Dec 31,2023 timeframe.
T4: The 25,000 cash collected on January 8, 2023✅, is included as
income for the taxable year 2023 because it was collected within the
January 1 to December 31, 2023, timeframe. Since Jenny uses the cash
basis, she did not report or file accrued income on February 8, 2022, for
the taxable year 2022 so no double taxation.
Answer: 45,000
CHAPTER 5-6: FINAL WITHHOLDING TAX
AND CAPITAL GAINS TAX
FWT POINTERS
• Final withholding tax is imposed on certain passive income earned from sources within
the Philippines. Passive income earned abroad by RC and DC is subject to regular income
tax because the BIR cannot impose tax obligations to non resident income payors to
withhold the taxes on their payments to RC and DC because the Philippines has no right,
it’s not within its jurisdiction.

• Passive income earned abroad by NRC, RA, NRA, RFC, NRFC is not subject to Philippine
taxes since these taxpayers are only taxed on their income earned within the Philippines.

• Final withholding tax of NRA- NETB and NRFC is generally 25% except those passive
income exempt from FWT.

• Passive income that is not part of the list of passive income subject to FWT is subject to
regular income tax.
CAPITAL GAINS TAX- STOCKS
• Capital gains tax only applies on gain on sale of domestic stocks classified as capital assets not
listed or traded in the stock exchange
• Capital gains tax rate is 15% on the realized gain on sale of domestic stock not listed or traded
in the PSE.
• Gain on sale of foreign stocks( issued by foreign corp) is subject to regular income tax since
withholding of the capital tax cannot be imposed abroad due to territorial consideration.
• Stocks is classified as capital assets if the seller is not a dealer of securities If the seller is a
dealer of securities, the domestic stocks is classified as ordinary asset.
Dealer of securities- merchant of stocks, regularly buys and sell stocks.
• If the domestic stock is classified as ordinary assets, whether it is listed or not listed in the stock
exchange, its realized gain on sale is subject to regular income tax not CGT.
• Domestic stocks classified as capital asset, listed or traded in the stock exchange is not subject
to CGT but subject to stock transaction tax of 6/10 of 1% of the stock’s selling price.
CAPITAL GAINS TAX -STOCKS

• All individual and corporate taxpayers may be subjected to capital

gains tax on their gain on sale of domestic stocks not listed or traded
in the stock exchange.
CAPITAL GAINS TAX- REAL PROPERTY
• Only the sale of real property( immovable) located within the Philippines, treated
as capital asset is subject to capital gains tax. Sale of real property treated as
capital assets located abroad is not subject to capital gains tax since withholding of
the capital tax cannot be imposed abroad due to territorial consideration.
• The sale, exchange and other disposition of real property capital assets in the
Philippines is subject to a tax of 6% capital gains tax of the selling price or the fair
value, whichever is higher.
• Real property is treated as capital asset if the property is not used in trade or
business and if it is not held by a real estate dealer, real estate lessor or habitually
engaged in real estate business, if so, the property is classified as an ordinary asset.
• If the real property is treated as ordinary asset (used for business) the gain on sale
of real property is subject to regular income tax not CGT.
CAPITAL GAINS TAX- REAL PROPERTY
• Real property is treated as ordinary asset if it is used, being used or have been
previously used in trade or business , but if the asset have not been used in business
for more than 2 years with proof thereof it will be converted to capital asset. But if
the real property is held by Real estate dealers , real estate developer, real estate
lessor and taxpayers habitually engaged in real estate business (those registered
with Housing and Land Use Regulatory Board or Housing and Urban Development
Coordinating Council as a dealer or developer or those with at least 6 taxable real
estate sales transactions in the preceding yr) the real property is treated
permanently as ordinary assets.

• Real property purchased for future use in business is an ordinary asset even if it
remained idle.
• Real properties used by an exempt corporation in its exempt
operation is treated as capital asset since exempt corporations are not
treated as corporations engaged in business. But if the exempt
corporation uses its real property for profit, the real property will be
classified as ordinary asset.

• Since real property used by an exempt corporation in its exempt

operation is treated as capital assets, the sale of the real property will
be subject to Capital gains tax.
Income tax schemes
Identify if the income is subject to final withholding tax, capital gains tax, regular income tax, or
exempt

1. RC's interest income on local currency deposits – short-term of a domestic bank. FWT, 20%
2. RC's interest income under the foreign currency deposit system of a domestic bank. FWT, 15%
3. NRFC's interest income under the foreign currency deposit system of a domestic bank. EXEMPT
4. RC's dividend income from a domestic corporation. FWT, 10%
5. Domestic corporation dividend income from another domestic corporation. EXEMPT
6. NRFC's dividend income from a domestic corporation assuming tax sparing applies. FWT, 15%
7. NRA-ETB gain on the sale of a personal car sold in the Philippines. REGULAR INCOME TAX
8. RA’s gain on the sale of a motorcycle used for business in the Philippines. REGULAR INCOME TAX
9. Gain on the sale of domestic stocks not listed or traded on the stock exchange (the sale is directly to the
buyer). CGT, 15%
10.An RC sold his residential house and lot located in America with a gain of $500,000 REGULAR INCOME TAX
11. Jake, a resident alien, sold his residential house and lot in the Philippines with a selling price of
P2,000,000, FMV of P3,000,000. The cost of the property is P1,000,000. CGT, 6%
12. RC owned a boarding house in the Philippines and sold it to his friend who is an RA. REGULAR
INCOME TAX
13. Gain on the sale of domestic stocks not listed or traded on the stock exchange where the seller is
a dealer of securities. REGULAR INCOME TAX.
14. NRA-NETB interest income from a long-term bank deposit in the Philippines. FWT, 25%
15. RC's dividend income from a foreign corporation. REGULAR INCOME TAX
16. RC's distributable share in the total net income of a taxable partnership. FWT, 10%
17. RC's distributable share in the total net income of a General Professional Partnership. REGULAR
INCOME TAX
18. RC's gain on the sale of foreign stocks directly to the buyer. REGULAR INCOME TAX
19. RC's interest income from lending to his friend Mario. REGULAR INCOME TAX
20. RC received a prize amounting to P8,000. REGULAR INCOME TAX
21. RC won the lottery in the USA worth $500,000 REGULAR INCOME TAX
22.NRFC won the PCSO lottery for P500,000. FWT, 25%
23. John, now an accountant, recently sold a real property that he previously acquired
when he was still working as a real estate dealer.REGULAR INCOME TAX
24. Sale of real property being used by an exempt corporation in its exempt
operations. CGT, 6%
25. The sale of a residential house and lot, previously used as a boarding house three
years ago, wherein the taxpayer shows proof that the house is no longer being used for
generating rental income. REGULAR INCOME TAX (the real property will remain an
ordinary asset since it was held by a real estate lessor)
PROBLEM SOLVING-FWT
Carlo received the following passive income in 2023

Interest, peso deposit, Landbank Philippines, P 100,000

Interest, $ deposit, BDO Philippines ($10,000 x P42) FCDU 420,000
Interest, deposit, Bank in Hongkong (HK$10,000 x P5) 50,000
Prize, Local Raffle from Gaisano Capital 50,000
PCSO winnings. 2,000,000
Prize won in contest in U.S. 300,000
Lotto winning in U.S. 100,000
Dividend, domestic company 600,000

Determine the total final tax in 2023 assuming he is:

1. RC
2.NRC
3.NRA-ETB
4. NRA-NETB
Carlo received the following passive income in 2023
1. RC
a.Interest, peso deposit, Landbank Philippines, P 100,000 a.100,000x 20% = 20,000
b.Interest, $ deposit, BDO Philippines ($10,000 x P42) FCDU 420,000 b.420,0000x15%=63,000
c.Interest, deposit, Bank in Hongkong (HK$10,000 x P5) 50,000 c. RIT (interest income earned
d.Prize, Local Raffle from Gaisano Capital from bank deposits abroad is
50,000 subject to RIT)
e.PCSO winnings.
2,000,000
d.50,000x20%=10,000
f.Prize won in contest in U.S.
e.2,000,000X 20%=400,000
300,000 f.RIT (prize won abroad subject
g.Lotto winning in U.S. to RIT of RC)
100,000
g. RIT(winnings won abroad
h.Dividend, domestic company
600,000
subject to RIT of RC)
h. 600,000 x 10% = 60,000

TOTAL FWT= 553,000

Carlo received the following passive income in 2023

NRC
a.Interest, peso deposit, Landbank Philippines, P 100,000
a. 100,000 x20% = 20,000
b.Interest, $ deposit, BDO Philippines ($10,000 x P42) FCDU 420,000
c.Interest, deposit, Bank in Hongkong (HK$10,000 x P5) 50,000
b. N/A – Non resident interest
income from foreign currency
d.Prize, Local Raffle from Gaisano Capital
50,000
deposit of a domestic bank is
exempt
e.PCSO winnings.
2,000,000 c. N/A – interest earned abroad,
f.Prize won in contest in U.S. NRC is only taxable on income
300,000 w/in PH
g.Lotto winning in U.S. d. 50,000 X 20% = 10,000
100,000
e. 2,000,000 x 20% = 400,000
h.Dividend, domestic company
600,000 f. N/A – prize earned abroad, NRC is
only taxable on income w/in PH
g. Same above
h. 600,000 x10% = 60,000
TOTAL FWT= 490,000
Carlo received the following passive income in 2023

3. NRA- ETB
a.Interest, peso deposit, Landbank Philippines, P 100,000 a. 100,000 x20% = 20,000
b.Interest, $ deposit, BDO Philippines ($10,000 x P42) FCDU 420,000 b. Exempt- non-residents not subject
c.Interest, deposit, Bank in Hongkong (HK$10,000 x P5) 50,000 to FWT on their interest income
from foreign currency deposit in a
d.Prize, Local Raffle from Gaisano Capital domestic bank
50,000
c. N/A – interest income earned
e.PCSO winnings. abroad, NRA-ETB is only taxable on
2,000,000 income earned within the PH.
f.Prize won in contest in U.S. d. 50,000 x 20% =10,000
300,000 e. 2,000,000 x 20% = 400,000
g.Lotto winning in U.S. f. N/A- income is earned abroad , NRA-
100,000 ETB is only taxable on income
h.Dividend, domestic company earned within the PH
600,000 g. Same above
h. 600,000 x 20% = 120,000
TOTAL FWT= 550,000
Carlo received the following passive income in 2023
NRA-NETB
a.Interest, peso deposit, Landbank Philippines, P 100,000 a. 100,000 x 25% = 25,000
b.Interest, $ deposit, BDO Philippines ($10,000 x P42) FCDU 420,000 b. Exempt- non-residents not
c.Interest, deposit, Bank in Hongkong (HK$10,000 x P5) 50,000 subject to FWT on their interest
income from foreign currency
d.Prize, Local Raffle from Gaisano Capital
50,000 deposit in a domestic bank
e.PCSO winnings. c. N/A – interest income earned
2,000,000 abroad, NRA-ETB is only taxable
f.Prize won in contest in U.S.
on income earned within the PH.
300,000 d. 50,000 x 25% = 12,500
g.Lotto winning in U.S. e. 2,000,000 x25%=500,000
100,000
f. N/A – income earned abroad,
h.Dividend, domestic company NRA-NETB is only taxable on
600,000
income earned within the PH.
g. Same above
h. 600,000 x 25% =150,000
i. TOTAL FWT=687,500
CAPITAL GAINS TAX – STOCKS
• Capital gains tax of only applies on gain on sale domestic stocks classified as capital assets
not listed or traded in the stock exchange
• Capital gains tax rate is 15% on the realized gain on sale of domestic stock not listed or
traded in the PSE.
• Stocks is classified as capital assets if the seller is not a dealer of securities If the seller is a
dealer of securities, the domestic stocks is classified as ordinary asset.
Dealer of securities- merchant of stocks, regularly buys and sell stocks.
• Domestic stocks classified as capital assets listed or traded in the stock exchange is not
subject to CGT but subject to stock transaction tax of 6/10 of 1% of the stock’s selling
price.
• Gain on sale of domestic stocks classified as ordinary assets listed or not listed in the stock
exchange is subject to regular income tax.
CAPITAL GAINS TAX - STOCKS
• Gain on sale of foreign stocks is subject to regular income tax since
withholding of the capital tax cannot be imposed abroad due to
territorial consideration.

• Foreign stock- stocks issued by a foreign corporation.

All individual and corporate taxpayers who sells domestic stocks not
listed or traded in the stock exchange may be liable to capital gains tax
PROBLEM SOLVING- CAPITAL GAINS TAX- STOCKS
On March 2021, Johnson sold the following shares of stock of domestic corporations
which he bought for investment purposes:
Listed and Traded Not Listed and
Traded
Selling price 250,000 140,000
Cost 118,000
80,000

1.How much is the capital gains tax?

2. Assuming that Johnson’s is a dealer in securities, the capital gains tax should be?
3. Assuming the shares sold were issued by foreign corporations, the capital gains tax
should be?
PROBLEM SOLVING- CAPITAL GAINS TAX- STOCKS
On March 2021, Johnson sold the following shares of stock of domestic corporations which he
bought for investment purposes:
Listed and Traded Not Listed and Traded
Selling price 250,000 140,000
Cost 118,000
80,000
Gain on sale of domestic stocks classified as
capital assets not listed or traded in the PSE:
Selling Price. 140,000
1. How much is the capital gains tax? -Cost. 80,000
Only gain on sale of domestic stocks Realized Capital gains. 60,000
classified as capital assets not listed or Capital gains tax rate. x 15%
traded in the stock exchange is subject to Capital gains tax. 9,000
CAPITAL GAINS TAX.
The sale of domestic stocks classified as Stocks classified as capital assets listed and
a capital asset through the PSE is subject traded in the PSE:
to stock transaction tax, with a rate of 250,000 (SP) x 6/10 of 1% = 1,500 stock
6/10 of 1% of selling price transaction tax
 Selling price of stocks 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 property received.

Cost of stocks shall include:

• Purchase cost (basis of stocks disposed)
• Selling expenses
• Documentary stamp tax on the sale if paid by seller
DST: tax on documents, instruments, loan agreements and papers evidencing the acceptance,
assignment, sale or transfer of an obligation, right or property incident thereto.
So in stock sale, the document is the stock certificate. The document is subject to DST. The
DST is then attached evidencing the transfer of ownership from seller to buyer.
PROBLEM SOLVING- CAPITAL GAINS TAX- STOCKS
On March 2021, Johnson sold the following shares of stock of domestic corporations which he
bought for investment purposes:
Listed and Traded Not Listed and Traded
Selling price 250,000 140,000
Cost 118,000
80,000
Net gain 132,000 60,000

Assuming that Johnson’s is a dealer in securities, the capital gains tax should
be?
The answer is 0 because John, being a dealer of securities,
regularly buys and sells stocks, making domestic stocks ordinary
assets to him. Therefore, the realized gain of 132,000 from the
sale of listed stocks and realized gain of 60,000 from the sale of
unlisted stocks are ordinary gains subject to regular income tax.
 PROBLEM SOLVING- CAPITAL GAINS TAX- STOCKS
On March 2021, Johnson sold the following shares of stock of domestic corporations which he
bought for investment purposes:
Listed and Traded Not Listed and Traded
Selling price 250,000 140,000
Cost 118,000
80,000
Net gain 132,000 60,000
Assuming the shares sold were issued by foreign corporations, the capital gains tax should be?

The answer is 0, because the situs of foreign stocks is from abroad.It is not
subject to capital gains tax since withholding of the capital tax cannot be
imposed abroad due to territorial consideration. Thus the gain on sale of
132,000 from listed and traded stocks, and 60,000 from not listed or traded
stocks are subject to regular income tax.
 CAPITAL GAINS TAX- REAL PROPERTY
• Only sale of real property located within the Philippines, treated as capital assets is subject
to capital gains tax. Sale of real property treated as capital assets located abroad is not
subject to capital gains tax since withholding of the capital tax cannot be imposed abroad
due to territorial consideration.
• The sale, exchange and other disposition of real property capital assets in the Philippines is
subject to a tax of 6% capital gains tax of the selling price or the fair value, whichever is
higher.

Fair value of real property is whichever is higher of the:

Zonal value- value prescribed by the Commissioner of Internal Revenue for real properties
(BIR valuation)
FMV or assessed value- shown in the schedule of market values of the Provincial and City
assessors. (Assessor’s valuation)
CAPITAL GAINS TAX- REAL PROPERTY
• 6% Capital gains tax on real property applies even if the sale transaction resulted to a
loss. Gain is always presumed to exist. The basis of taxation of real property subject to
CGT is the selling price or fair value whichever is higher, not the actual gain.

• The Basis of actual gain of real property only applies to gain on sale of real properties
treated as ordinary assets, The gain is called ordinary gain subject to regular income
tax.

• Real properties held by Real estate dealers , real estate developer, real estate lessor
and taxpayers habitually engaged in real estate business (those registered with HLURB
or HUDC as dealer or developer or those with at least 6 taxable real estate sales
transactions in the preceding yr) are treated permanently as ordinary assets thus the
actual gain from sale is subject to regular income tax.
 Example: RC sold his Residential house and lot for 10,000,000. Cost is
6,000,000. Zonal value is 8,000,000. Assessed value is 15,000,000.
REAL PROPERTY-SUBJECT TO
REAL PROPERTY- SUBJECT TO CAPITAL GAINS TAX
REGULAR INCOME TAX
(LOCATED WITHIN THE PH, CLASSIFIED AS A (LOCATED ABROAD OR CLASSIFIED
CAPITAL ASSET )
AS ORDINARY ASSET)

Basis (SP or FMV whichever is higher). 15,000,000 Selling price. 10,000,000

Capital gains tax rate. x 6% - Cost. 6,000,000
Realized gain. 4,000,000
Capital gains tax. 900,000
The 4,000,000 realized gain form
part as income subject to regular
income tax.
CAPITAL GAINS TAX- REAL PROPERTY
• The 6% capital gains tax is applicable to all individual taxpayers, but in terms of corporate
taxpayers it only applies to domestic corporations.
• NIRC does not impose final capital gains tax on Foreign corporations but in case the
foreign corporation realized a gain from the sale of real property classified as capital
assets. The capital gain shall be subject to regular income tax.

• In the case wherein the taxpayer sold his principal residence (family home) and used fully
the proceeds to buy a new principal residence , the sale of old principal residence will not
be subject to capital gains tax if requisites of exemptions are met. (read requisite of
exemption pg. 204 Income taxation Banggawan book 2023-2024). If the proceeds on the
sale of the old principal residence is only used partially to buy a new principal residence,
only the % of unutilized portion will be used to determine the tax base of real property
subject to capital gains tax.
Determination of Capital Gains Tax Due if the Proceeds of
Sale, Exchange or Disposition of his Principal Residence has not
Been Fully Utilized.
Step 1: Determine the percentage (%) of non-utilization applying the
formula
Unutilized portion of Gross selling price of old residence
÷ Gross selling price of old residence
% of Non utilization

Step 2: Multiply the % of non-utilization by the GSP or FMV of the old

principal residence whichever is higher.
Step 3: Multiply the product in item (2) above by the rate of six percent
(6%).
Lany has a principal residence with a selling price of 10,000,000 , zonal value of 15,000,000 and assessed
value of 12,000,000. He sold his principal residence and used the proceeds to buy a new principal
residence with a selling price of 4,000,000 3 months after the sale. Assuming requisites of exemptions are
made in regards to the sale of principal residence. How much is the capital gains tax of Lany?

Step 1: determine % of unutilized portion

Unutilized portion 6,000,000. ( 10M proceeds – 4M utilized portion)
÷ Proceeds ( the GSP of the old principal residence). 10,000,000
= Unutilized portion percentage 60%

Step 2: Multiply the % of non-utilization by the GSP or FMV of the old principal residence whichever is
higher.
15,000,000 x 60%
=9,000,000 tax base

Step 3: Multiply the product in item (2) above by the rate of six percent (6%).
9,000,000 x 6% = 540,000 CAPITAL GAINS TAX
PROBLEM SOLVING- CAPITAL GAINS TAX – REAL PROPERTY

Vincent sold a residential house and lot held for 10,000,000 to his friend. The property’s
Assessed value is 12,000,000 and its zonal value is 15,000,000.

1.How much is the capital gains tax?

2. Assuming the house and lot was Vincent's principal residence and he used 1/2 of the
proceeds to buy a new principal residence within eighteen (18) months after the above
sale. Assume further that Vincent properly informed the BIR about the sale. The capital
gains tax shall be?
3. Based on the above problem, but assuming the residential house is located abroad, the
capital gains tax should be?
Vincent sold a residential house and lot held for 10,000,000 to his
friend. The property’s Assessed value is 12,000,000 and its zonal value
is 15,000,000.

How much is the capital gains tax?

Selling price. 10,000,000 Tax base capital gains tax 15,000,000

Assessed value. 12,000,000 Capital gains tax rate. x 6%
Zonal Value 15,000,000 Capital gains tax 900,000
BASIS (WHICHEVER IS HIGHER)
Zonal value. 15,000,000
 Vincent sold a residential house and lot held for 10,000,000 to his friend. The property’s Assessed value
is 12,000,000 and its zonal value is 15,000,000.

2. Assuming the house and lot was Vincent's principal residence and he used 1/2 of the proceeds to buy a
new principal residence within eighteen (18) months after the above sale. Assume further that Vincent
properly informed the BIR about the sale. The capital gains tax shall be?

Unutilized proceeds from sale of old principal residence. 5,000,000 ( 10M proceeds x ½ unutilized)
÷ Selling price of old residence. 10,000,000
= Unutilized portion 50%

Basis of capital gains tax (whichever is higher). 15,000,000

Unutilized portion. x 50%
Tax base subject to capital gains tax. 7,500,000
Capital gains tax rate (6%). x 6%
Capital gains tax. 450,000
 Vincent sold a residential house and lot held for 10,000,000 to his friend. The
property’s Assessed value is 12,000,000 and its zonal value is 15,000,000.

3. Based on the above problem, but assuming the residential house is located abroad,
the capital gains tax should be?

The answer is 0, capital gains tax does not apply on sale of real property held as
capital asset located abroad since withholding of the capital tax cannot be imposed
abroad due to territorial consideration. Thus the realized gain on the sale of the
residential house is subject to regular income tax.
So assuming the cost of residential house and lot is 7,000,000, the selling price is
10,000,000 so the realized gain is 3,000,000. That realized gain will be subject to
regular income tax.