Dealings in Properties
Dealings in Properties
Dealings in Properties
Dealings in property refer to the disposal of assets (ordinary assets or capital assets) either through sale
or exchanges. Under the tax code, the following are ordinary assets:
1. Stock in trade of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of taxable year.
3. Real property held by the taxpayer primarily for sale to customers in the ordinary course of
trade or business.
On the other hand, capital assets 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 above.
ILLUSTRATION 1:
4) Goodwill
7) Real property held for sale in the ordinary course of trade or business by a real estate company.
Answer:
1) Capital asset
2) Ordinary asset
3) Capital asset
4) Capital asset
5) Capital asset
6) Capital asset
7) Ordinary asset
8)Ordinary asset
9) Capital asset
10) Ordinary asset
Applicable Taxes
Property classification of an asset as capital or ordinary is important because of the special tax rules on
gains and losses from sales or exchanges of capital assets which do not apply to gains and losses from
sale or exchanges of ordinary assets. Gains on sale or exchanges of capital assets and ordinary assets
may be subjected to the following types of taxes:
DISCUSS THE TABLE
ORDINARY GAIN
Subject to basic tax. Thus, it shall form part of the taxpayer's taxable income.
CAPITAL GAINS
Subject to Ordinary or Basic Income Tax
All other capital asset transactions other than assets subject to percentage taxes and capital gains taxes
may result to either capital gains or capital losses which are subject to basic tax (Refer to Table 8-1).
4. HOLDING PERIOD
This rule is applicable only to individual taxpayers, estates and trusts. Holding Period refers to 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 or exchange. The amount of capital gains and losses will depend on the length of time
the asset was held by the Individual taxpayer as follows:
The entire amount of capital gains and losses incurred by corporations shall be recognized regardless
of the holding period. However, the rule that capital losses are recognized only to the extent of
capital gains shall likewise apply to corporate taxpayers.
This rule is applicable only to individual taxpayers. If an individual taxpayer sustains in any taxable
year a net capital loss, such loss shall be treated in the succeeding year as a short-term capital loss.
Meaning, it can be deducted against net capital loss in the year immediately following the year when a
net capital loss was incurred.
The amount that can be deducted from the net capital gain of the succeeding year should not be
in excess of the net income (after personal exemption) at the time the capital loss was incurred.
The foregoing rules do not apply to capital asset transactions involving real property and shares of
stock of domestic corporations as these are subject to final capital gains taxes.
Any loss sustained by a domestic bank or any trust company from sale of bonds, debentures, notes or
certificate or other evidences of indebtedness issued by any corporation, including those issued by the
government is considered as an ordinary loss deductible from ordinary income
Computation of Gains and Losses from Dealings in Property
Gains or losses from dealings in property refer to the difference between the amount of value received
by the taxpayer over the determined value of the property he has disposed of arising from sale, and/or
exchange of assets.
Amount realized P xx
Less: Cost basis XX
**Gain/(Loss) (Pxx)
In computing the gain or loss from the sale or other disposition of property, the cost basis shall be as
follows:
ILLUSTRATION 2:
An individual taxpayer, single, has the following data for the taxable year:
Assume the same data in Case A, except that the taxpayer is a corporation.
Determine the taxable income of the corporation.
An individual taxpayer, single, has the following data for the taxable year:
Given the following data during the 2024 calendar year, determine the taxable income assuming the
taxpayer is a citizen of the Philippines.
Solution:
Business income P 800,000
Business expenses (500,000)
Compensation income 500,000
Net capital gain:
Gain on sale of bonds (50%) 30,000
Capital loss - sale of car (100%) (50,000)
Net capital loss carry-over -
Taxable income P800,000
NET CAPITAL LOSS CARRY-OVER of a previous year is deductible only to the extent of net capital
gain in the succeeding year, In addition, the net capital loss carry over should not be more that the
taxable income of the previous year when the net capital loss was incurred. In the problem provided,
the taxpayer cannot avail of net capital loss carry over because capital loss was higher than capital gain
during the current year.
Given the following data during the 2024 calendar year, determine the taxable income assuming the
taxpayer is a citizen of the Philippines.
"The net capital loss carry-over should not be more than the net taxable income at the time the net
capital loss was incurred.
❖The remaining P150,000 (P200,000-P50,000) net capital loss incurred in 2023 is no longer allowed
as a net capital loss carry over after 2024.
Solution:
Solution:
Business income P 800,000
Business expenses (500,000)
Net capital gain:
Gain on sale of bonds (50%) 70,000
Capital loss - sale of car (100%) (10,000)
Net Capital Gain 60,000 60,000
Taxable income P360,000
Rules on holding periods and capital loss carry-over are not applicable to corporate taxpayers.
Beginning January 1, 2018, a "Percentage tax of 6/10 of 1% of the gross selling price or gross value in
money of shares of stock sold, bartered, or exchanged through the local stock exchange (Listed Shares)
also known as Stock Transaction Tax. The following sellers or transferors of stock are liable to this tax:
The shares of stock referred to above pertain to shares of stock held as capital assets. The seller should
not be a dealer in securities, otherwise, the sale is subject to basic income tax as well as value added tax
(Refer also to Volume 2-Transfer and Business Taxation). Since the basis of the tax is gross selling
price, any gain or loss from sale or exchange is ignored. Therefore, regardless of whether the
transaction resulted in the realization of profit or loss, as long as a transaction occurred referring to a
sale or exchange of shares of stock held as capital asset in a local stock exchange, it is subject to a
percentage tax of 6/10 of 1% of gross selling price. The stock broker who effected the sale shall collect
the tax from the seller and remit the same to the collecting bank within five (5) banking days from the
date of collection thereof.
ILLUSTRATION 3:
George sold 2,000 shares of a domestic corporation listed in a local stock exchange at 110 per share
(Acquisition cost - P100 per share).
Question1: How much is the capital gains tax on the sale of shares?
Answer: P0. The transaction is exempt from capital gains tax.
Question4: Assume that George is a dealer in securities, determine the applicable taxes and the
amount of tax due.
Answer. The transaction is subject to: Basic Income Tax based on the gain or loss on sale and Value
Added Tax (Business Tax) computed as follows:
Value Added Tax (VAT) is not an income tax. It is a business tax like percentage tax. Value Added
Tax is discussed in Volume 2 of this book entitled, Transfer and Business Taxation.
a. CAPITAL GAINS TAX on sale of shares of stock of a domestic corporation sold directly to a buyer
computed at a tax rate of 15% of capital gains
b. CAPITAL GAINS TAX on sale of real properties held as capital asset situated in the Philippines
computed at a rate of 6% of the highest amount among the selling price, fair market value and zonal
value.
Refer to Chapter 2 (Individual Taxpayers) for a detailed discussions and illustrations on capital gains
tax.