TX05 | Capital Gains/Losses on Dealings in Sale of Real/Personal Properties

LECTURE NOTES

Capital Asset

Capital Asset – any property held by the taxpayer (whether or not connected with trade or business) but does not
include –
a. Stock in trade
b. Property included in inventory if on hand at the close of the taxable year
c. Property primarily for sale to customers in the ordinary course of trade or business;
d. Personal property used in trade or business and subject to depreciation
e. Real property used in trade or business

Sale of Capital Asset classified as Real Property

Guidelines in Determining Whether Capital or Ordinary Asset

Ordinary Asset Capital Asset

1. Taxpayers engaged in Real estate
business
- Real estate dealer
- Real estate developer
- Real estate lessor
- Those habitually engaged in
the real estate business
2. Taxpayers not engaged in the real
estate business
3. Taxpayer who changed business
from real estate business to non-real
estate business; or who amended the
Articles of Incorporation as to primary
purpose
4. Taxpayer originally registered to be
engaged in the real estate business
but failed to subsequently operate
5. Treatment of abandoned and all
real properties
6. Treatment of real properties
- Transferred through
succession or donation to heir
or donee
- Received as dividend by
stockholder
- Transferred in a tax-free
exchange where transferor is
not engaged in real estate
business
All real properties acquired
All real properties
- Acquired (developed or
undeveloped)
- Held primarily for sale or for
lease
- Which would properly be
included in the inventory of
the taxpayer if on hand at the
close of the taxable year
- Used in the trade or business
(land, building or other
improvements)
All real properties (land and/or
improvements)
- For lease/rent or being
offered for lease/rent
- For use or being used in the
trade or business
All real properties acquired in the
course of trade or business
Real properties (land, building or Real property used by an exempt
other improvements) used, being corporation in its exempt operations
used or have been previously used in (not considered used for business
the trade or business of the taxpayer purposes)
Shall not result in the reclassification
of real property held from ordinary
asset to capital asset
All real properties originally acquired
shall continue to be treated as
ordinary assets
Real property initially acquired by a If taxpayer is engaged in business
taxpayer engaged in the real estate other than real estate business,
business shall not result in its ordinary asset is converted to capital
conversion into a capital asset even if asset upon proof that it has not been
the same is subsequently abandoned used in business for more than 2
or becomes idle. years prior to the consummation of
the taxable transaction
Heir, donee or stockholder
- Is not engaged in the real
estate business and
- Does not subsequently use
such property in trade or
business
The real property received in an
exchange shall be treated as ordinary
asset in the hands of the transferee
- Who is engaged in real estate
business or
- Who, even if not engaged in
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7. Treatment of real property subject
of involuntary transfer (including
expropriation or foreclosure sale)
real estate business, will use
the same in business
No effect on the classification of such
real property in the hands of the
involuntary seller, either as capital or
ordinary asset, as the case may be

Basis of Property disposed of

In the preceding pro-forma computations of gain or loss, the basis of the property disposed of is the cost at which the
taxpayer acquired the property. Primarily, this basis would depend on the manner in which the taxpayer acquired the
property:
1. If the property was acquired by purchase, basis is cost (purchase price plus expenses related to acquisition). This cost
may later be increased by capital expenditures.
2. If the property is included in the taxpayer’s inventory, basis is the latest inventory value.
3. If the property was acquired by devise, bequest or inheritance, basis is the fair market value as of the date of
acquisition.
4. If the property was acquired by gift, basis is the value as 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 gift, the basis shall be such fair market value, for purposes of determining the loss.
5. If the property was acquired for less than an adequate consideration in money or in money’s worth, the basis is the
amount paid by the transferee for the property or the transferor’s adjusted basis

If the cost or value of the property cannot be convincingly shown by the taxpayer, then the selling price shall be
considered the gain.

Applicable Taxes on Sale, Exchange or Other Disposition of Real Property

Taxpayer Location of Basis Capital Asset Ordinary Asset

Property
1. Individuals
- Engaged in trade or
business in the PH Within GSP or FMV, higher 6% CGT 20-35%
(Citizens, aliens,
estates and trusts) Note: Sale to Govt: 6% or 20-35%
- Not engaged in
trade or business in Within Same 6% CGT
the PH (NRA-NETB)
2. Corporations
Domestic Within
Same 6% CGT 30%RCIT or 2%MCIT
Resident Foreign
Within Same 30%RCIT or 2%MCIT 30%RCIT or 2%MCIT
Corporation
Non-resident foreign
Within Same 35% Final Tax 35% Final Tax
Corporation

Sale of Principal Residence

1. Principal Residence – refers to the dwelling house, including the land on which it is situated, where the husband and
wife or an unmarried individual, whether or not qualified as head of family, and members of his family reside.

2. Rate and Base – 6% of selling price or fair market value (zonal value or assessor’s value), whichever is higher
3. Exemption from tax – If the proceeds of sale shall be utilized in acquiring new residence within 18 calendar months
from the date of sale
4. Proceeds of sale not fully utilized – If the proceeds of sale is not fully utilized in the purchase or construction of a new
residence, the portion of the gain presumed to have been realized on the sale shall be subject to tax. The taxable portion
shall be computed as follows:

(Unutilized amount/Gross Selling Price) x Higher of GSP or FMV

Sale of Capital Asset classified as Personal Property

Rules on Capital Asset (Personal Property) Transactions

A. Definitions:
1. Capital gain - gain on sale or exchange of capital asset
2. Capital loss - loss on sale or exchange of capital asset
3. Ordinary gain - gain on sale or exchange of ordinary asset
4. Ordinary loss - loss on sale or exchange of ordinary asset
5. Net capital gain – excess of the capital gain over capital loss
6. Net capital loss – excess of the capital loss over capital gain

TAXPAYER IS INDIVIDUAL
1. Capital losses are deductible only from the capital gain
2. There is holding period and there is carry over. If the asset was held for
Not more than 12 months (short-term)- 100%
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More than 12 month (long-term)- 50%
3. The amount of net capital loss to be carried over should not exceed the net income for the year in which the loss was
sustained.
4. Carry over is good only for one year

TAXPAYER IS CORPORATION
1. Capital losses are deductible only from capital gain
2. Ordinary losses may be deductible from capital gain
2. No holding period and no carry over

Capital Gains and Losses on Stock Transaction

- Sale of shares of stock of a domestic corporation which are not listed and traded in the local stock exchange or
(directly to buyer) is subject to 15%
- Sale of shares of stock of a domestic corporation which are listed and traded in the local stock exchange is
subject to ½ of 1% of the gross selling price
- Section 6 of RR 6-2008 states that there shall be levied, assessed and collected on every sale, barter, exchange
or other disposition through initial public offering (IPO) of shares of stock in closely held corporations (means
corporation with at least 50% in value of the outstanding capital stock or at least 50% of the total combined
voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty
(20) individuals) under the following rules:

Proportion of Disposed Shares to Outstanding

Tax Rate
Shares
Up to 25% 4%
Over 25% but not over 33 1/3% 2%
Over 33 1/3% 1%

Transactions Deemed Sale or Exchange

1. Retirement of bonds, debentures or other evidence of indebtedness with interest coupon or in registered form
2. Securities becoming worthless
3. Failure to exercise a privilege or option to buy or sell property
4. Short sale of property
5. Receipts of a liquidating dividend
6. Readjustment of interest in tax exempt partnership

Wash sales/ short sales

1. Wash sale is a sale of securities where substantially identical securities are acquired or purchased within a 61-day
period beginning 30 days before the sale and ending 30 days after the sale.

2. Treatment of –
a. Gains on wash sales – taxable gains
b. Losses from wash sales – not deductible losses

3. Wash sales provisions do not apply to:

a. Individuals or corporations acting as dealers in stocks or securities if the sale or disposition is made in the ordinary
course of trade or business
b. short sale transactions – is a sale of stock which the seller does not own (he merely borrows the stock certificate
through or from his broker) and subsequently buys or covers the stock to complete the transaction

QUIZZERS

1. A feature of ordinary gains as distinguished from capital gains:

a. Gains from sales of assets not stock in trade
b. May or may not be taxable in full
c. Sources are capital assets
d. No holding period
2. Lots being rented when subsequently sold are classified as:
a. Capital assets
b. Liquid assets
c. Fixed assets
d. Ordinary assets
3. The term “capital assets” includes:
a. Stock in trade or other property included in the taxpayer’s inventory
b. Real property not used in the trade or business of taxpayer
c. Property primarily for sale to customers in the ordinary course of his trade or business
d. Property used in trade or business subject to depreciation
4. Winston operates a retail store and owns the following property. Indicate which of the properties is capital asset in the
hands of Winston:
a. The building which houses the retail store
b. Inventory on hand at the end of the year
c. Fixtures used in the retail store
d. Trade accounts receivable
5. One of the following is not a capital asset.
a. Stock investment
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b. Liquidating dividend
c. Interest of a partner in a partnership
d. Machine with useful life of 10 years used in business
6. Individual, single, has the following records during 2018:
Net income from business 140,000
Sales of asset:
Gain, sale of ordinary asset held for 5 years 30,000
Gain, sale of capital asset held for 6 years 40,000
Loss, sale of capital asset held for 9 months 60,000
The taxable income of the taxpayer is:
7. In addition to his business, Momo had the following sale of capital assets in 2018:

Jewelry Personal Car Television Bicycle

Date sold 3/15/2018 5/16/2018 9/5/2018 12/5/2018
Selling price P80,000.00 400,000.00 6,000.00 12,000.00
Date acquired 5/10/2015 7/15/2016 2/9/2018 1/10/2018
Acquisition cost P10,000.00 350,000.00 5,000.00 20,500.00
Selling expense P1,000.00 20,000.00

The net capital gain of Momo in 2017 is:

8. Cruz is not engaged in real estate business. He sold a 1,000 square meter residential land for P300,000.00 ib March
15,2018. The land was acquired by purchase on March 5,2016 for P120,000.00. After acquisition, the land was fenced at
a cost of P30,000.00. A commission of 5% of the sales price was paid to the broker. How much is the capital gains tax
due?

9. A resident citizen who is married, had the following data in 2018:

Gross sales P400,000.00

Capital gain on sale of asset held for 10 months 10,000.00
Dividend from resident corporation 15,000.00
Cost of goods sold 100,000.00
Capital loss on sale of asset held for 6 months 5,000.00
Operating expenses 20,000.00

If the taxpayer chose the optional standard deduction, the taxable income is:

10. Andres sold his residential house to Bert for P5,000,000.00 on February 3,2018. The deed of sale was notarized on
the following day. Its assessor’s value when he inherited was P6,000,000.00 although its zonal value is P8,000,000.00.

The tax on the above transaction is:

11. The capital gains tax on the sale is due without penalty on
12. Assuming the residential house is located abroad, the capital gain’s tax is:

13. On August 15,2018, Ryan sold a residential condominium unit for P3,000,000.00. The unit was acquired in 2010 for
P1,800,000.00. On the date of sale, the fair market value of the condo unit as shown in the real property declaration is
P2,500,000.00 and the assessed value amounts to P2,200,000.00. The zonal value is P70,000.00 per square meter.
Assuming the unit has 50 square meters.

The capital gains tax is:

14. The capital gains tax of Ryan if the proceeds of sale shall be utilized in acquiring a new residence is:
15. In item 14 the basis of the new residence is:
16. The amount to be deposited in escrow if the proceeds of the sale shall be utilized in acquiring a new residence is:
17. The capital gains tax payable assuming that Ryan will utilize only P2,000,000.00 of the proceeds in acquiring new
residence:
18. In item 17, the basis of the new residence is:

19. A Co. had investments in shares of stock of B Co. that it acquired at a cost of P20,000.00. It also had investments in
shares of stock of C Co. that it acquired at a cost of P40,000.00. The value of the shares of stock of B Co. had decreased
to P15,000.00, while the shares of stock of C Co. are now worthless, and had to be written off. The deductible loss is:

20. Miss Michelle has the following transactions on substantially identical stocks
Date Purchases (100 shares)
3/20/2017 Price, P20,000.00
4/18/2017 Price, 18,000.00
2/28/2018 Price, 18,500.00
Sales (100 shares)
5/7/2017 3/20/2017 –purchase, P17,500.00
1/20/2018 4/18/2017 – purchase, 17,000.00

Compute the loss in 2017 and 2018 and indicate whether it is deductible or not.

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