Module 9

Income from
Dealings in Property

Leomar R. Cabarles
 Contents
1. Definition and tax treatment
2. Types of properties
3. Valuation of real property and stocks
4. Types of gains from dealings in property
5. Tax-free exchanges
6. Net capital loss carry-over (NCLCO)
7. Sale of principal residence
8. Transfer for insufficient consideration
Income from Dealings in Property
• Dealings in property such as sales
or exchanges may result in gain
or loss.

• The kind of property involved

(i.e., whether the property is a
capital asset or an ordinary asset)
determines the tax implication
and income tax treatment.
Tax Treatment

Net
Capital Gains
Taxable Ordinary
(other than
net income net income
those subject
to final CGT)
Types of Properties

Properties
(tax purposes)

Ordinary Capital
assets assets

Used in the Other than

ordinary course of ordinary assets
trade/business
Ordinary Assets
• Stock in trade

• Property included as inventory

• Merchandise inventory

• Depreciable assets used in the trade/business

• Real property used in trade/business

Capital Assets
• Stock and securities held by taxpayers other
than dealers in securities
• Interest in partnership and joint venture
• Goodwill
• Real property not used in trade or business like
residential house and lot
• Investment property
• Personal or non-business properties, such as
family car, home appliances, jewelry
Ordinary or Capital Asset?
Asset—Taxpayer Classification
Real property— Ordinary
Real estate business
Real property used in business— Ordinary
Non-real estate business
Real property— Ordinary
Non-real estate business but habitually engaged
in the real estate business (at least six (6)
taxable real estate sale transactions during the
preceding year)
Securities— Ordinary
Dealer in securities
Checkpoint Question #1
Valuation of Real Property
Highest of:

• Selling price,

• Fair market value or zonal value as determined

by the Commissioner of Internal Revenue, or

• Fair market value as shown in the schedule of

values of the Provincial or City Assessor
Fair Market Value of Shares of Stock
Held as Capital Assets
Stock Valuation
Listed Closing price or, if no trades on valuation
date, nearest-day closing price

Unlisted:
Common Book value
Preferred Liquidation value
Club shares Selling price or the bid price, whichever
is higher
Types of Gains from Dealings in Property

1 2 3

Ordinary gain Actual gain Long-term

(loss) vis-à-vis capital gain
vis-à-vis presumed vis-à-vis
capital gain gain short-term
(loss) capital gain
Taxability of Capital Gain
Sale of: Tax

Stocks of a domestic 15% capital gains tax (CGT), a

corporation—not traded in final income tax, based on net
the local stock exchange capital gains realized during the
taxable year
Stocks of a domestic 6/10 of 1% stock transaction tax
corporation—traded in the (STT), a percentage tax, based
local stock exchange on gross selling price (GSP)
Real property in the CGT
Philippines
Other capital assets Normal tax
(included in gross income)
 Illustration 1

Sale of Real Property –

Ordinary or Capital Asset
In 1970, Juan Gonzales bought one hectare of agricultural land in
Laguna for P100,000. This property has a current fair market value
of P10 million. He agreed to exchange his agricultural lot in Laguna
for a one-half hectare residential property located in Batangas, with
a fair market value of P10 million, owned by Alpha Corp., a
domestic corporation engaged in the purchase and sale of real
property. Alpha Corpo. acquired the property in 2007 for P9 million.
What is the nature of the real properties exchanged for tax
purposes - capital asset or ordinary asset? Explain.
SUGGESTED ANSWER:
With regard to the Laguna property, it is a capital asset because it is
agricultural land. The Batangas property, in contrast, is an ordinary
asset because it is either (1) held for sale to customers in the
ordinary course of business or (2) real property used in the trade of
business of a realtor like Alpha Corp.
Persons Not Liable to 15% CGT
1. Dealers in securities

2. Investors in shares of stock in a mutual fund

company in connection with gains realized upon
redemption of stock in the mutual company.

3. All other persons, whether natural or juridical, who

are specifically exempt from national revenue taxes
under existing investment incentives and other
special laws
Actual Gain vis-à-vis Presumed Gain

Actual amount realized from the sale of the

gain asset in excess of the cost

the presumption of the law of the existence

Presumed of a gain from sale of real property subject
gain to CGT of 6% based on the selling price or
FMV whichever is higher.
Capital Gain: Long-Term and Short-Term

Taxpayer % of Gain/Loss Reported

Individual • 100% if held for 12 months or less

• 50% if held for more than 12 months

Corporation 100%
Checkpoint Question #2
Computation of Gain or Loss

Selling Price
Gain (Loss) (net of selling Cost
expenses)

Money and fair see next slides

market value of
the property
consideration
Cost or Basis of Property Sold
Acquisition Cost/Basis

Purchase Purchase price plus expenses of

acquisition acquired on/after 3/1/1913

Inheritance, devise, Fair market value at the time of death

or bequest
Gift or donation Same as that of the donor by whom it was
not acquired by gift, except if greater than
FMV at the time of gift
Acquired for less Amount paid by the transferee
than adequate
consideration
Cost or Basis of Property Sold (Cont’d)
Acquisition Cost/Basis of Stock or Securities Received by
Transferor
Property Same basis of property or securities exchanged
acquired
where gain Increased by:
or loss is not • dividends of the shareholder
recognized • gain recognized by the exchange
(tax-free
exchanges) decreased by:
• money received
• fair market value of other property received
• liability assumed by the transferee
Cost or Basis of Property Sold (Cont’d)
Acquisition Cost/Basis of the property transferred in the
hands of the transferee:
Property Same as it would be in the hands of the
acquired transferor increased by the amount of the gain
where gain recognized to the transferor on the transfer
or loss is not
recognized
(tax-free
exchanges)
Tax-Free Exchanges
There is no gain or loss recognized if: Consolidation
forms a new
1. A corporation exchanges property solely
corporation:
for stocks in a corporation (both parties
A+B=C
to merger/consolidation)
2. A corporation, in exchange for its voting
stock, substantially (at least 80% of the
assets) acquires another corporation Merger results
in a surviving
3. Recapitalization of corporation entity:
A + B = A or B
4. Reincorporation
Checkpoint Question #3
Checkpoint Question #4
Checkpoint Question #5
Income Tax Treatment of Capital Loss
• Capital losses are only
deductible up to capital gains

• Net capital loss is not

deductible from ordinary
income

• Applicable to both
corporations and individuals
Net Capital Loss Carry-Over (NCLCO)
• Taxpayer is other than a
corporation

• Holding period should not

exceed 12 months

• Not exceed the net income for

the year incurred (prior year’s
net income) [i.e., it is subject
to tax-benefit rule)
Capital Gain or Loss: Corporations
• No holding period (no NCLCO)
• Capital gains and losses are recognized
in full
• Capital losses are deductible only to
the extent of capital gains
• Net capital losses are not deductible
from ordinary gain
• Ordinary losses are deductible from
net capital gains
Capital Gains from Sale of Real Property
• Disposition of real property classified
as capital asset in the Philippines by a
non-dealer in real estate

• Final tax rate is 6% based on the

highest between:
1. Gross selling price
2. Zonal value of real properties
determined by the Commissioner
3. Fair Market Value as determined by
the Provincial and City Assessors
Sale of Real Property to Government
An individual taxpayer has the option to
treat the capital gain as subject to

• 6% CGT or

• graduated income tax

if the buyer of the real property is the

Government or any of its political
subdivision, or GOCC.
Sale of Principal Residence
• "Principal Residence" is the family
home of the individual taxpayer

• Capital gains from sale or

disposition of principal residence
by natural persons (a citizen or
resident alien and does not
include an estate or a trust) may
be exempt
Exemption Requirements
1. Proceeds were used to acquire a new principal residence
within 18 calendar months

2. Historical cost of sold principal residence be carried to the

new principal residence

3. Commissioner duly notified within 30 days

4. Availed only once every 10 years

5. 6% CGT shall be deposited with a bank; released only upon

certification by the RDO that the proceeds of the sale have
been utilized
Basis of New Principal Residence
Partial Exemption
If no full utilization of proceeds of sale, such portion is
subject to 6% CGT using the following formula:
 Illustration 2

Sale of Principal
Residence
 Cost of New Principal Residence > Gross Selling Price
Old Capital Gain Tax New
P300,000

6%

Fair Market Value : P5,000,000

Historical Cost : P 1,000,000 New Cost Basis: P4,000,000

Gross Selling Price : P4,000,000 < Acquisition Cost : P7,000,000

100% Utilized - Exempt

Tax exempt
 Cost of New Principal Residence = Gross Selling Price
Old Capital Gain Tax New
P300,000

6%

Fair Market Value : P5,000,000

Historical Cost` : P 1,000,000 New Cost Basis: P1,000,000

Gross Selling Price : P4,000,000 = Cost : P4,000,000

100% Utilized - Exempt Tax exempt

 Cost of New Principal Residence < Gross Selling Price
Old Capital Gain Tax New
P300,000

6%

Fair Market Value : P5,000,000

Historical Cost` : P 1,000,000 New Cost Basis: P750,000

Gross Selling Price : P4,000,000 = Cost : P3,000,000

¾ Utilized – Exempt P225,000

¼ Unutilized – Taxable 75,000
100% Total P300,000
 Illustration 3

Sale of Principal
Residence
 DISPOSITION OF THE PRINCIPAL RESIDENCE IN
EXCHANGE FOR PROPERTY PLUS CASH
Utilized portion = 5/6
Mr. Buendia Mr. Yabut

EXCHANGE

Principal residence + Cash

Fair market Value = P4,000,000 Fair market Value = P5,000,000

Cash paid = P2,000,000

Historical Cost = P1,000,000 Historical Cost = P500,000

New Cost Basis = P3,000,000 New Cost Basis = P416,667

Capital Gain Tax = EXEMPT Capital Gain Tax = P 60,000

Transfer for Insufficient Consideration
• The amount by which the FMV of the
property exceeded the value of the
consideration shall be deemed a gift

• Excluding:
– Sale of real property subject to 6% CGT
– Transaction in the ordinary course of
business (which is a bona fide, at arm’s
length, and free from any donative
intent)
Applicable Taxes – Sale of Real Property
Located in the Philippines
Taxpayer Tax
A. Individual citizens (including estates and
trusts), resident aliens, and NRA-ETB:
1. Capital asset 6% CGT based on GSP
or FMV, higher (if sold
to government,
option for 6% CGT or
graduated tax)
2. Ordinary asset Expanded CWT
(ordinary tax) based
on GSP or FMV, higher
B. NRA-NETB 6% CGT based on GSP
or FMV, higher
Applicable Taxes – Sale of Real Property
Located in the Philippines
Taxpayer Tax
C. Domestic corporations
1. Capital asset (land and buildings) 6% CGT based on GSP
or FMV, higher
2. Ordinary asset and capital asset Expanded CWT
other than land and building (ordinary tax) based
on GSP or FMV, higher
D. Resident foreign corporations Expanded CWT
(ordinary tax) based
on GSP or FMV, higher
E. Non-resident foreign corporation 25% FWT on gain on
sale
Applicable Taxes – Sale of Real Property
NOT Located in the Philippines
Taxpayer Tax
A. Resident citizens or domestic Ordinary tax
corporations

B. Non-resident citizens, alien Exempt

individuals and foreign corporations
- End -