Taxation Review 1

Lecture on Dealings in Property

GENERAL FORMULA: Selling Price – Cost of Property = Gain or Loss

1. Where, Selling Price equals to the total consideration received or Fair Market Value or the property in
case disposed through exchange.

2. Where, Cost is equal to the acquisition cost if purchased or acquired on or after March 1, 1913;
a. If acquired through inheritance, the cost is equal to the FMV on the date of transfer;
b. If acquired through donation or gift, the cost is the same as if it would be in the hands of the
donor or the last preceding owner by whom it was not acquired by gift, EXCEPT if such basis
is greater than the FMV at the time of gift, then for purposes of determining the LOSS, the basis
shall be such FMV;
c. If acquired by less than full and adequate consideration, the basis is the money or money’s
worth paid.

Example:
(i) A sold his land to B for P 17.00. The land, costing P20.00, was inherited by A from his father
where by the time it was inherited, the FMV of such land amounted to P 15.00.
SP = P 17.00
Cost = P 15.00 (FMV at the time inherited)
Gain = P 2.00

(ii) Assume A acquired the land, costing to C P20.00, through gift from C, his grandfather. At the time
of gift, the FMV of such land is P21.00.
SP = P 17.00
Cost = P 20.00 (Cost to C)
Loss = P 3.00

(iii) Assume A acquired the land through gift from C, his grandfather. C also acquired such land by
donation from D. D acquired the land through purchase at P16.00. At the time it was received by
C from D, the land was valued at P20.00. At the time of donation from C to A, the FMV of such
land is P21.00.
SP= P17.00
Cost= P 16.00 (Cost to D who acquired the land through purchase)
Gain= P1.00

(iv) Assume A acquired the land through gift from C, his grandfather. C also acquired such land by
donation from D. D acquired the land through purchase at P21.00. At the time it was received by
C from D, the land was valued at P17.00. At the time of donation from C to A, the FMV of such
land is P19.00. A sold such land for P17.00 to B.
SP= P17.00
Cost= P21.00 (Cost to D who acquired the land through purchase)
Loss= P 4.00 (not to be recognized since it would only impose lesser tax)

SP= P17.00
Cost= P 19.00 (FMV at the time donated to A by C)
Loss= P 2.00 (Loss to be recognized, the lower amount)

(v) Assume A acquired the land through gift from C, his grandfather. C also acquired such land by
donation from D. D acquired the land through purchase at P19.00. At the time it was received by
C from D, the land was valued at P17.00. At the time of donation from C to A, the FMV of such
land is P23.00. A sold such land for P17.00 to B.
SP= P17.00
Cost= P19.00 (Cost to D who acquired the land through purchase)
Loss= P 2.00 (Loss to be recognized, the lower amount)

SP= P17.00
Cost= P23.00 (FMV at the time donated to A by C)
Loss= P 6.00 (not to be recognized since it would only impose lesser tax)
 Taxation Review 2
Lecture on Dealings in Property

(vi) A sold his car for P25.00 to B. The car was acquired 2 years ago from S, his friend. The car was
valued at P21.50 on the date of acquisition. However, A was able to convince S to buy the car for
only P16.00.
SP= P25.00
Cost= P16.00 (The amount paid by A to S)
Gain= P9.00

Properties are classified into:

Ordinary Assets Capital Assets
a. Inventories, stocks in trade
held by dealers, other property or in
kind included in inventory of the a. Other than those enumerated as ordinary assets
taxpayer (e.g. work in process
inventory and finished goods b. All properties not used in business
inventory, stocks)
c. investment whether or not connected with taxpayers trade
b. Property held for sale to are capital assets (e.g. investment in equity securities and
customers in the ordinary course of investment in subsidiary)
business (real estate developer)
d. Residential house and lot
c. Properties used in business
which is subject to depreciation or e. Family car
amortization (factory, office building,
patents) f. Receivables arising from sale of inventory

d. Real property used in business

(land which the factory stands)
Subject to CGT Subject to Normal Tax
 
NOTE: a. Sale of stocks not listed
1. Gains and losses derived from sale or and not traded in local stock a. Other than those listed as
exchange of these properties are exchange (15% of capital gains) Major Capital Assets (stocks not
ORDINARY GAINS and LOSSES traded and listed, and real
which are included in determining properties subject to 6% CGT),
ordinary income subject to tax. b. Sale of real capital all other capital gains are
properties NOT used in subject to normal tax (added in
business (6% CGT based on the gross income)
2. Gains/Losses shall be part of FMV or SP, whichever is
GROSS INCOME of such seller (as higher).
other income) subject to Normal Tax. b. HOLDING PERIOD is
c. NO HOLDING PERIOD since
  applicable ONLY to individual
the capital gains tax is a final tax
  taxpayers
on the date of sale.
 
  c. NO HOLDING period for
  corporations.
d. GAINS or LOSSES are no
  longer reportable since the sale d. Gains are reportable in full
  was already subjected to final subject to holding period
CGT. clause.
  e. Losses are reportable only
  to the extent of CAPITAL
GAINS.

NOTE: ALL ordinary gains are ADDED to the GROSS INCOME and all ordinary losses are deducted from the
gross income, ordinary gains and/or capital gains. HOWEVER, capital losses are ONLY deducted from CAPITAL
GAINS. No capital losses exceeding capital gains may be deducted from ordinary gains nor gross income.

Selling price means net selling price: (SP or FMV) – Expenses of sale or exchange

HOLDING PERIOD is applicable ONLY to individual taxpayers.

a. Capital assets held for not exceeding 12 months, the taxable gain or deductible loss is 100% of such
gain or loss.
b. Capital assets held for more than 12 months, capital gains taxable in 50%, however, in case of capital
loss deductible in full, but limited only to the extent of capital gains.
c. In case of net capital loss, such loss shall be carried over to the succeeding year.
 Taxation Review 3
Lecture on Dealings in Property

Net Capital Loss Carry-Over (NCLCO)

 The net capital loss of one year may be carried over to the succeeding year, but not exceeding the
taxable income of the year when such net capital loss was sustained.
Example:
Mr. N, a citizen of the Philippines, single had the following data:
2010 2011
Net income from business P 80,000 P 90,000
Interest from notes of clients 4,000 2,000
Capital gain on shares of foreign
corporation held for 3 years 50,000
Capital gains on jewelry held for 10 months 70,000
Capital loss on bonds, held for 4 months 120,000

Solution:
2010 2011
Net Income from Business P 80,000 P 90,000
Interest income 4,000 2,000
Ordinary net income 84,000 92,000
Capital Gain (50%) P 25,000
Capital Gain (100%) P70,000
Capital Loss (100%) (120,000)
Net Capital Loss ( 95,000)
NCLCO (84,000)
Net Capital Gain (14,000)
Total

Taxable Income 84,000 92,000

 Corporate taxpayers are not subject to holding period, thus cannot carry-over its net capital loss.

INSTALLMENT REPORTING

When a deferred payment is of sale of an ordinary asset, or of a capital asset which is not subject to capital
gain tax, the gross profit or gain from the sale may be reported on the installment method, IF such sale is by:
a. One who is a dealer in personal property regularly selling on installments; or
b. One who makes a casual sale or disposition of personal property (other than inventory) for a selling price
in excess of one thousand pesos (P1,000.00) and with initial payments not exceeding 25% of the selling
price; or
c. One who makes a sale of real property, with initial payments not exceeding 25% of the selling price.

Without Mortgage With Mortgage but no Excess With Mortgage in excess over
  over the Cost the Cost
IP= DP + Payments received IP= DP + Payments received this
this year year IP= DP + Payments received this year
    plus Excess of Mortgage over the Cost
IP ÷ SP = 25% or less (allowed IP ÷ SP = 25% or less (allowed for
for Installment Reporting) Installment Reporting) IP ÷ SP = 25% or less (allowed for IR)
     
GP ÷ CP x total collections = GP ÷ CP x total collections = GP ÷ CP x total collections = Income
Income Realized Income Realized Realized
     
IP= Initial payments, payments
of the buyer to seller, whatever
form (cash, properties,
cancellation of indebtedness,
etc.) which is received during
the year. It is not similar to
down payment.    
DP= Downpayment In this case, the contract price is In this case, the contract price is equal
equal to selling price minus to the selling price minus mortgage
 Taxation Review 4
Lecture on Dealings in Property

assumed by the buyer plus excess of

mortgage assumed by the buyer. mortgage over cost.
SP= Selling price    
GP= Gross Profit    
CP= Contract Price    
     
In this case, the selling price is
the contract price.    

CAPITAL GAIN TAX EXEMPTION: Requirements

a. The capital asset sold was a principal residence;
b. The taxpayer is a citizen of the Philippines or resident alien;
c. The proceeds of the sale was invested in acquiring a new principal residence;
d. Notice to make such utilization was given to the BIR within 30 days from the date of sale;
e. Utilization of the proceeds of the sale was made within eighteen (18) months from the date of sale;
f. A cash deposit is made with an accredited bank for an amount equal to the capital gain tax, and
answerable for the capital gain tax should the conditions for the exemption be not satisfied;
g. The exemption shall be availed of once only every ten years.

 If the entire proceeds of the sale is invested, the entire capital gain is exempt. The cost basis of the
new principal residence will be the basis of the old residence.

 If only a portion of the proceeds of the sale is invested in the new residence,
Exemption on Capital gain tax:
Proceeds of the sale not invested x what should have been
Entire proceeds of the sale the tax (CGT)
Basis of the new principal Residence:
Proceeds of the sale invested x Basis of the old Residence
Entire proceeds of the sale

 If the amount invested is in excess of the proceeds of the sale, the capital gain is exempt and the
basis for the new principal residence is equal to the basis of the old residence plus the additional
investment ( New Residence = Old residence + additional capital investment)