Week 11

Dealings in Property
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 the 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.
2. Property used in the trade or business subject to
depreciation.

3. Real property held by the taxpayer primarily for

sale to customers in the ordinary course of trade or
business

4. Real property used in trade or business of the

taxpayer
 Illustration
Classify the following as Ordinary or Capital assets
1. Stock and securities held by taxpayers as investment
2. Stock and securities held dealers in securities
3. Interest in partnership and joint venture
4. Goodwill
5. Real property not used in trade or business
6. House and Lot
7. Real property held for sale in the ordinary course of trade or
business by a real estate company.
8. Real property used as a warehouse
9. Real property held as investment by a real estate company
10. Parking space for lease
 Answer:
1. Capital asset
2. Ordinary asset
3. Capital asset
4. Capital asset
5. Capital asset
6. Capital asset
7. Ordinary asset
8. Ordinary asst
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:
Applicable INCOME TAXES for Capital Gains and
Ordinary Gains
Capital gain on
1. Sale of shares of domestic corporations directly to
a buyer
Applicable tax
Subject to 15% CGT on capital gain.
2. Sales of shares of domestic corporations through
local stock exchange

Not subject to income tax regardless of whether

the transaction resulted to a gain or loss. It is subject to
stock transaction tax of 6/10 of 1% of gross selling
price under the TRAIN Law. A stock transaction tax is
classified as “other percentage tax” which is a
“business tax” not an income tax.
3. Sale of real properties classified as capital assets
in the Philippines

- Subject to 6% capital gains tax based on the

highest amount among the selling price, fair
market value and zonal value.
4. Sale of real properties classified as capital assets
in the Philippines to the government its agencies or
GOCC’s by an individual taxpayers

- Either 6% capital gains tax or basic tax at the

option of the taxpayer
5. All other types of capital gains other than those
enumerated in 1-4

- Subject to basic income tax. Part of the

taxpayer’s taxable income but subject to rules
on capital gains and losses
Capital Gains Subject to Ordinary or Basic Income
tax

All 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
Rules in the Recognition of Capital Gains and
Losses

1. The transaction must involve property classified

as capital asset.
2. The transaction must arise, generally, from sale or
exchange
3. Net Capital gains are added to ordinary gains.
However, if the result is a net capital loss, such
loss can only be deducted from the capital gain.
4. Holding Period
This rule is applicable only to individual taxpayers,
estates and trust. 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 depend on the
length of time the asset was held by the individual taxpayer
as follows:
Holding Period Percentage to be recognized
12 months or less 100 %
More than 12 months 50 %
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.
5. Net Capital Loss Carry -over
The 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.
Illustration

Case A (Holding Period-Individual Taxpayer)

An individual taxpayer, single , has the following data for the
taxable year :
Ordinary income P240,000
Ordinary loss 40,000
Capital gain on capital asset held for 6 Months 10,000
Capital gain on capital asset held for 3 years 40,000
Capital loss on capital asset held for 15 months 10,000
Question : How much is the net taxable income?
Computed as:
Ordinary income P240,000
Ordinary loss (40,000)
Capital gain:
Short term capital (100%) 10,000
Long term capital gain (50%) 20,000
Long term capital loss (50%) (5,000) 25,000
Taxable Income P225,000
Case B (Holding Period-Corporate Taxpayer)
Assume the sa data in case A, except that the taxpayer
is a corporation. Determine the taxable income of the
Corporation.
Computed as:
Ordinary income P240,000
Ordinary loss (40,000)
Capital gain:
Short term capital (100%) 10,000
Long term capital gain (100%) 40,000
Long term capital loss (100%) (10,000) 40,000
Taxable Income P240,000

● Holding period is not applicable to corporate taxpayers

Case C (Holding Period and Net Capital “Loss”
-Individual Taxpayer):
An individual taxpayer, single, has the following data for
2020:
Ordinary income P240,000
Ordinary loss 40,000
Capital gain on capital asset held for 6 Months 10,000
Capital gain on capital asset held for 3 years 40,000
Capital loss on capital asset held for 15 months 80,000
Question : How much is the net taxable income?
Ordinary income P240,000
Ordinary loss (40,000)
Capital gain:
Short term capital (100%) 10,000
Long term capital gain (50%) 20,000
Long term capital loss (50%) (40,000)
Taxable Income P200,000

● Capital loss is deductible only to the extent of capital gain.

Case D (Net Capital “Loss” Carry Over-Individual
Taxpayer ):

Given the following data during the calendar year

2020, determine the taxable income assuming
the taxpayer is a citizen of the Philippines without
dependent child.
 Business income P800,000
Business expenses 500,000
Compensation income 500,000
Capital gain on sale of bonds held
For (20) months 60,000
Capital gain on direct sale to a buyer
Of shares of domestic corp. For 6 months 150,000
Capital loss on sale of a car held for
10 months 50,000
Capital loss on sale of land in the Phil.
Held for two (2) years 100,000
Capital loss in 2019( net taxable income
P100,000) 200,000
Computation :
Business income P800,000
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 than 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.
Case E (Net Capital “Loss” Carry Over- Individual Taxpayer)
Given the following data during the calendar year (2020 determine
taxable income assuming the taxpayer is a citizen of the Philippines
without dependent child.
Business income P800,000
Business expenses 500,000
Compensation income 500,000
Capital gain on sale of bonds held for 2 months 60,000
Capital gain on direct sale to buyer of shares of
Domestic corporation held for 6 months 150,000
Capital loss on sale of a car held for 2 years 10,000
Capital loss on sale of land in the Philippines
Held for 2 years 100,000
Capital loss in 2019(net taxable income in 2019
was P50,000) 200,000
Answer : 805,000 computed as follows
Buss, income P800,000
Buss. expenses (500,000)
Compensation income 500,000
Net capital gain:
Gain on sale of bonds (100%) 60,000
Capital loss- sale of car (50%) (5,000)
Net capital gain 55,000
Net capital loss carry over** (50,000) 5,000
P805,000
 ** 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(200,000-P50,000) net
capital loss incurred in 2019 is no longer
allowed as a net capital loss carry over after
2020
Case F (Taxpayer-Domestic Corporation)
Given the following data during the calendar year (2020)
determine the taxable income assuming the taxpayer is a
“domestic corporation”.
Buss. income P800,000
Buss expenses 500,000
Capital gain on sale of bonds held for 2 months 70,000
Capital gain on direct sale to buyer of shares of
Domestic corporation held for 6 months 150,000
Capital loss on sale of a car held for 2 years 10,000
Capital loss on sale of land in the Philippines
Held for 2 years 100,000
Capital loss in 2019(net taxable income in 2019
Was P50,000) 200,000
 Answer : P360,000 computed as follows:
Buss, income P800,000
Buss. expenses (500,000)
Net capital gain:
Gain on sale of bonds (100%) 70,000
Capital loss- sale of car (100%) (10,000)
Net capital gain 60,000 60,000

P360,000
● Rules on holding periods and capital loss carry-over are
not applicable to corporate taxpayers.
 Capital Gains Subject to Percentage Tax

January 1,2018- Percentage tax of (6/10) * 1%=

0.006 of the gross selling price or gross value
in money of
● shares of stock sold
● Bartered
● Exchanged through the local stock exchange

-Also known as Stock Transaction tax

 The following sellers or transferors of stock are liable
to this tax:

a. Individual taxpayer, whether citizen or alien

b. Corporate taxpayer, whether domestic or foreign.
c. Other taxpayers not falling under a and b above, such
as estate, trust, trust funds, and pension funds,
among others
 Rule: 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 of gross selling
price.

● The stock broker who affected the sale shall collect

the tax from the seller and remit the same to the
collecting bank within 5 banking days from the date of
collection thereof.
Illustration : Question 1
George sold 2,000 shares of a domestic corporation
listed in a local stock exchange at 110 per share
(Acquisition cost-P100 per share)

Question 1: How much is the capital gains tax on the sale

of shares?
Answer : P 0

*The transaction is exempt from capital gains tax.

Question no. 2
How much is the income subject to basic or
ordinary tax?

Answer : P 0
Question 3: What is the applicable tax on transaction?
Answer : Percentage tax of P1,320 computed as follows:

Selling price (2,000 sh. X P110) 220,000

x Percentage tax rate .006
Percentage /transaction tax 1,320.00
Question No. 4 : 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:

Selling price (2,000 sh. X P110 ) P220,000

Cost (2,000 sh. X P100) (200,000)
Gross income subject to basic tax 20,000
 Selling price (2,000 sh. X P110 ) P220,000
Cost (2,000 sh. X P100) (200,000)
Gross income 20,000
x VAT rate 12%
Output Vat (Buss. Tax) P2,400

● Value Added Tax is not an income tax. It is a business

tax like percentage tax.
 Capital Gains Subject to Capital Gains Tax

a. CGT 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. CGT on sale of real properties held as capital asset situated
in the Philippines computed at a rate 6% of the highest
amount among the selling price, fair market value and zonal
value.

● Not applicable to foreign corporations.

End of slides