DEALINGS IN PROPERTIES

3. Net capital loss is not an item of deduction against gross income.

Ordinary Assets – are properties held by the taxpayer which includes the following: 4. Rule on holding period: Holding period factor is multiplied with the computed
1. Stocks in trade, item of properties primarily for held for sale in the ordinary course of capital gains or losses on a per property basis as follows:
his trade or business or items to be included in the inventory account at the end of a. Short-term (not more than 12 months held) 100%
the year. Be it noted that items included in the inventory depends upon the nature or b. Long-term (more than 12 months held) 50%
operations of the business. 5. Net Capital Loss carry-over is good for one taxable year only.
2. Personal property used in business and subject to allowance for depreciation. The amount to be carried over to the next year is whichever is lower between:
3. Real property used in trade or business whether subject or not subject to a. The amount of net capital loss actually sustained.
depreciation. b. The amount of (net) taxable income before capital asset transactions in
the year in which the net capital loss was sustained; or
Capital Assets – are assets that are not ordinary assets.
c. The amount of available net capital gains next year.
6. Rule of holding period does not apply to corporations.
Sale, Exchange and other Disposition (SED) subject to Capital Gains Tax
7. Carry-over of net capital loss is not allowed for corporations.
1. S.E.D. of domestic stocks held as capital assets, sold directly to buyers are subject to
15% capital gains tax based on net capital gains. NOTE:
2. S.E.D of real properties held as capital assets are subject to 6% capital gains tax based  Compensation Income Earners do not have ordinary assets. All of their assets are
on Selling Price, Fair Value as determined by the city or municipal assessor’s office or capital assets.
Zonal Value as determined by the CIR whichever is higher.  Business/Professional Income earners and Mixed income earners needs to classify
their assets if they are capital or ordinary assets.
Computation of Gains or Losses on Ordinary or Capital Assets  Capital assets are not subject to depreciation.
Sales Price/Fair Value of Property or Consideration Received xxx,xxx  Ordinary assets like personal or real property (except land) used in business are
Tax Basis of the Property SED xxx,xxx subject to depreciation of tax purposes.
Gain or Loss xxx,xxx  The item of properties subjected to capital gains tax will no longer be taxed under
regular income tax.
Tax Treatment for Ordinary Gains and Losses
1. Ordinary gains are separate items of gross income subject to regular income tax. Tax Basis of the Property Acquired by Gratuitous Title:
These are taxable in full. A. If the property is acquired by donation, the tax base of the property is whichever is
2. Ordinary losses are items of deduction from the gross income in the determination of lower between:
taxable income from business or profession. These are deductible in full.  the fair value at the date of donation or
 the value of the property in the hands of the donor or the last owner who does
Tax Treatment of Capital Gains and Losses on transactions not subject to CGT. not acquired it by gratuitous means.
1. Capital losses are deductible only up to the extent of capital gains from dealings in B. If the property is acquired by inheritance, the tax base of the property is the fair
capital assets other than domestic shares and real properties.
value at the date of death of the decedent.
2. Net capital gain is an item of gross income subject to regular income tax.
Transactions Considered as Exchanges Tax Free Exchanges
The following are subject to the rules of dealings in properties: 1. Merger and consolidation
2. Initial acquisition of corporate control
1. Retirement of bonds, debentures, notes or certificates and other evidence of
indebtedness (debt instruments held as investments) except for instruments with Rules on Wash Sales
original maturity of more than 5 years which are exempt from any income tax, Wash sales occur when substantially identical securities are acquired within a 61- day
notwithstanding the actual holding period. period beginning 30 days before the sale and ending 30 days after the sale. The gains from
2. Short sales of property- is a sale by a speculator of securities borrowed in anticipation wash sales are taxable, but losses are not deductible. However, the wash sales provisions
of a decline in security value. When the security falls, the speculator gains by buying do not apply to:
at the lower price and replacing the borrowed securities he sold. a. Dealers in stocks or securities if the sale or disposition is made in the ordinary course
of trade or business.
3. Option contract gains or losses b. Short sale transactions- a sale of stock which the seller does not own (he merely
4. Worthless securities or actual shrinkage in the value of the securities- the loss should borrows the stock certificate through or from the broker) and subsequently buys or
actually be sustained. Unrealized loss or decline in value of securities are not covers the stock to complete the transaction.
considered worthlessness.
5. Receipt of Liquidating dividends- the difference between the proceeds of the
liquidating dividends and the tax base of the investment is a capital gain or loss
subject to regular income tax rules. (not 15% CGT)
6. Liquidation of partnership, the resulting gain or loss (RR 6-2008)
a. If business Partnership is subject to capital gains tax rules.
b. If General Professional Partnership is subject to regular income tax.
7. Redemption of shares for cancellation or retirement (RR 6-2008)
a. Gain on the redemption of own stocks by domestic corporations are not
subject to tax.
b. Gains or losses realized by the investor from buy-back of corporate stocks,
domestic or foreign shall be subject to regular income tax.
8. Voluntary buy-back of shares to be held in treasury (RR 6-2008)
a. Gains or losses on voluntary buy-back of shares by the issuing corporation are
not subject to tax.
b. Gains or losses realized by investor shall be subject to capital gains tax in cases
of domestic stocks and subject to regular income tax on foreign stocks.