DEALINGS

IN
PROPERTY

Dealings in Property
refers to the disposal through sale or exchange of

Ordinary
Assets

or

Capital
Assets

Ordinary Assets.

Section 39 (A) of the NIRC

1. Stock in trade intended for sale in the normal course of

business, such as:
a. Merchandise inventory; or
b. Securities held or being sold by dealers in securities

2. Real properties acquired by real estate dealers or developers

3. Properties used in business subject to depreciation provided in
Section 34 (F) of NIRC
4. Real properties used in trade or business including real
property

held for rent

Capital Assets
Property of a taxpayer other than ordinary assets
Examples:

Stock and securities held by taxpayers other than dealers in

securities
Interest in partnership and joint venture
Goodwill
Real and personal properties not used in trade or business
Investment property

Change of
Purpose

Purchasing Holding
Determining factor:

PURPOSE AT THE TIME OF

SALE

Taxes on Ordinary and

Capital Asset Transactions

Ordinary Assets.
Sale or exchange of ordinary assets is
subject to normal or ordinary taxes
5% to 32%
30%

for individual taxpayers

for corporate taxpayers

Capital Assets.
Subject to Final Taxes
Sale of real property
subject to 6% CGT
based on the selling price or zonal
value, whichever Is higher
Sale of securities
subject to 5% CGT
on the first P100,000 capital
gain and 10% on the excess of
the first P100,000 if securities
are NOT traded in the stock
exchange
subject to % to 1% OPT
based on the selling price if the
securities are traded in the stock
exchange

Subject to Normal Taxes

Net capital gains on sales of

capital assets other than real
property and equity/debt
securities

Other National Taxes.

Ordinary Assets
Real
Income tax
Documentary stamp tax
Business tax

Normal
Yes
Yes

Securities
Normal
Yes
Yes

Others
Normal
No
Yes

Capital Assets
Real
Income tax
Documentary stamp tax
Business tax

CGT
Yes
No

Securities
CGT/OPT
Yes
No

Others
Normal
No
No

Bank and Trust Companies.

Investments in stocks and

securities owned by banks

Real and other properties

(ROPA)
including stocks and securities acquired by
banks for clients loans settlements

Capital Assets
(banks are not considered dealers in securities)

Ordinary Assets

Measurement of Gain or Loss

GAIN

Excess of amount realized - basis or adjusted basis

LOSS

Excess of basis or adjusted basis amount realized

AMOUNT REALIZED

Sum of money received + FMV of

the property (other than money)
received

COST AND EXPENSES OF ASSETS DISPOSED

Acquisition cost and incidental expenses

(related to the acquisition of asset)

CAPITALIZED
Adjusted cost and the expenses
(related to the disposition of asset)

REDUCTION FROM SELLING

PRICE

Special Rules in Determining Acquisition Cost (Cost Basis).

Section 40(B) of the NIRC

1. If the property was acquired by purchase on or after March 1,

1913
Basis: Acquisition Cost
2. If the property was acquired by inheritance
Basis: FMV at the date of acquisition (time of inheritance)
3. If the property was acquired as a gift
Basis: as if in the hands of the donor; or
FMV at the time the gift was made
whichever is lower
4. If the property was acquired for less than full and adequate
consideration
Basis: amount paid by the transferee

Ordinary
Gain
(Loss)

Capital
VS Gain (Loss)

derived from sale or

exchange of
ordinary assets

excess of value
received over the
determined cost from
the sale or exchange
of a capital asset

NET CAPITAL GAIN (LOSS)

Net Capital Gain
- excess of the gains over the losses on sales or exchanges of
capital assets during the taxable year

Net Capital Loss

- excess of the losses over the gains on sales or exchanges of
capital assets during the taxable year

PREFERENTIAL TAX TREATMENT FOR CAPITAL GAIN

(LOSS)
The tax rules for the gains or losses from sales or exchanges of
capital assets over the ordinary assets are as follows:

1. Net capital gain is added to ordinary gain but net

capital loss is NOT deductible from ordinary
gain.
2. Net ordinary loss is deductible from net capital gain.
3. Capital losses are deductible only to the extent of
capital gain.

4. For the individual the reportable percentages of capital

gain or loss shall be:
a. 100% if the capital asset is held for one year or less than one
year (short-term holding period)
b. 50% if the capital asset is held for more than one year (longterm holding period)

5. Conditions for net capital loss carry-over (NCLCO)

a. The taxpayer is other than a corporation;
b. The amount of NCLCO does not exceed the taxable income
(before exemptions) at the year when the capital loss was
sustained; and
c. The NCLCO shall be treated in the following year as loss from
the sale or exchange of a capital asset held for not more than
12 months.

CAPITAL GAINS OR LOSSES SUSTAINED BY A

CORPORATION
Rules:
1. There no holding period; hence, there is no net capital loss
carry-over.
2. Capital gains and losses are recognized to the extent of their
full amount.
3. Capital losses are deductible only to the extent of capital gains.
4. Net capital losses are not deductible from ordinary gain or
income but ordinary losses are deductible from net capital
gains.

TAX TREATMENT OF ORDINARY AND CAPITAL

ASSETS
Ordinary asset transaction
GAIN business income subject to normal tax
LOSS ordinary loss allowed as deduction from other business
income and capital gains
Capital asset transaction
GAIN capital gains to be reduced by capital loss incurred during
the
taxable year
LOSS capital loss allowed as deduction from the capital gains
only

DISPOSITION OF REAL
PROPERTY
The disposition of real property shall be
taxed according to classification whether or
not the property is used in trade or business

REAL PROPERTY NOT USED IN BUSINESS

Generally, the sale or exchange of real property not used in
business

CAPITAL ASSET TRANSACTION

Subject to 6% CAPITAL GAINS TAX,

based on the selling price or zonal value
whichever is higher

REAL PROPERTY NOT USED IN BUSINESS (cont.)

REMINDERS!
1. Land owned by religious order, if sold, is subject to a
capital gains tax of 6%
2. NOT subject to CGT:
a. Land Reform
b. Exchange of real property for shares of stock
(original issue)
c. Error in selling of lot (pa documentary stamp)
3. If not used in trade or business and only the selling
price is used
a. Foreclosed by banks
b. Sold by a government corporation

DISPOSITION OF
PRINCIPAL RESIDENCE
the family home of the individual tax payer
refers to the dwelling house
the residential address of a natural
person as certified by the Barangay
Chairman or the Building Administrator

DISPOSITION OF PRINCIPAL RESIDENCE

subject to 6% CGT
Based on selling price or zonal value,
whichever is higher

If the proceeds from the

disposition of principal residence
are fully utilized in acquiring or
constructing a new principal
residence within 18 months from
the date of disposition (date of
notarization), the transaction is
exempted from CGT subject to
the following conditions:

EXEMPTIONS FROM CAPITAL GAINS

TAX
1. Historical cost or adjusted basis of property sold is carried over to the new
principal residence;
2. The Commissioner is notified within 30 days from the date of disposition of
the taxpayers intention to avail of the tax exemption;
3. Tax exemption can only be availed of once every ten (10) years;
4. Unutilized portion of the proceeds is subject to 6% CGT based on the portion
of the gross selling price or zonal value, whichever is higher
5. The tax on the unutilized portion shall be paid within 30 days after the
expiration of the 18-month period.

BASIS OF THE NEW

PRINCIPAL RESIDENCE
1. SALES PROCEEDS FULLY UTILIZED
2. SALES PROCEEDS PARTIALLY APPLIED
3. ACQUSITION COSTS EXCEED THE ENTIRE SALES PROCEEDS

1. SALES PROCEEDS FULLY

UTILIZED

Cost of the new principal

residence = cost of the
old residence sold
irrespective of the actual amount of the sales
proceeds

2. SALES PROCEEDS PARTIALLY

UTILIZED
The basis of the new principal would be:

The basis of the new principal residence disregards the actual

acquisition cost because the entire sales proceeds were partially
utilized

3. ACQUISITION COSTS EXCEED THE ENTIRE

SALES PROCEEDS
The basis (cost) of the new principal residence would
comprise the following:
Cost basis of the old
principal
residence sold

Additional cost in
acquiring the new
principal residence

SALE OR EXCHANGE OF REAL

PROPERTY USED IN BUSINESS
The sale or exchange of real property used in trade
or business is not a capital asset transaction, but an
ordinary asset transaction.

subject to normal tax

Rule 1: If the real property sold or

exchanged is classified as inventory,
the gross selling price or FMV,
whichever is higher, shall be subjected
to a creditable withholding tax.
A. Where the seller/transferor is exempt from
creditable withholding tax in accordance with
the BIR Revenue Regulation

Exempt

B. Upon the following values of the property,

where the seller/transferor is habitually
engaged in the real estate business:
1. With a selling price of P500,000 or less

1.5%

2. With a selling price of more than

P500,000 but not more than

3.0%

P2,000,000
3. With a selling price of more than
P2,000,000

5.0%

Rule 2: If the real property sold or

exchanged is classified as ordinary
asset other than inventory , the
creditable withholding tax is 6% of the
gross selling price or fair market
value, whichever is higher.

Rule 3: If the real property classified as capital

asset is sold to any government unit or any of its
political subdivisions or agencies or to any
government owned and controlled corporation by
an individual taxpayer, at the option of the
individual taxpayer-seller the tax would either be:
a. 6% final capital gains tax based on sales proceeds, or
b. Normal tax rate (5% to 32%) based on the net taxable income. If the
taxpayer opted for the normal tax rate, then the sale is to be withheld
with 6% creditable withholding tax.

SELLER EXEMPT FROM CREDITABLE

WITHHOLDING TAX
1.
2.

National or local government and its instrumentalities

Persons enjoying exemption from payment of income taxes such as:
a. Corporations registered with the Housing and Land Use Regulatory Board
(HLURB), engaged in socialized housing project, provided that the selling price per
house and/or lot does not exceed:
P180,000 in Metro Manila and other urbanized areas, and
P150,000 in other areas
b. Corporations registered with the Board of Investments (BOI) and enjoying
exemption from the income tax provided by Republic Act No. 7916 and the
Omnibus Investment Code of 1987
c. Corporations which are exempt from the income tax under Sec. 30 of the NIRC, to
wit: GSIS, SSS, PHIC, PCSO

INSTALLMENT REPORTING OF
SALE OF REAL PROPERTY
ORDINARY ASSET REAL PROPERTY:
1. If the buyer is an individual not engaged in trade or business,
no withholding is required to be made on the periodic
installment payments.
2. If the buyer is engaged in trade or business, the tax shall be
deducted and withheld by the buyer from every installment based
on the ratio of actual collection of consideration against the
agreed consideration appearing in the Contract to Sell applied
to the gross selling price or fair market value of the property
at the time of the execution of the Contract to Sell, whichever
is higher.

Sale of Real Property Not Located in the Philippines

Income on sale of real property not located in the

Philippines regardless of classification sold by a
resident citizen or domestic corporation shall be
subject to the normal income tax rate using the
schedular tax rates or 30%, respectively.

STOCK TRANSACTIONS

Stocks classified as capital assets are stocks and

securities held by a taxpayer other than dealers in
securities. If sold, these securities are subject to
capital gains tax.

 For the purpose of determining the applicable tax on

stock transactions, the following rules shall be
observed:
1.

Dealers in securities are not liable to the stock transaction

tax of of 1% based on the selling price or FMV,
whichever is higher.
The gains or loss from sale are ordinary income subject to normal tax.

 2. Non-dealers in securities are either liable to stock

transaction tax of
of 1% based on the selling price or FMV, whichever is
higher (traded-in the stock market)
Capital gains tax of 5% to 10% (not traded-in the stock
market)

Valuation of Shares of Stock Not Listed and Traded in the Local Stock
Exchanges

Fair Value of Asset

xxx
Less: Fair Value of Liabilities
xxx
Adjusted net asset values
xxx

 When a company has real properties the appraised

value of the real property at the time of sale shall be
the higher of
The FMV as determined by the Commissioner, or
The FMV as shown in the schedule of valued fixed by the
Provincial and city assessors, or
The FMV as determined by Independent Appraiser

Unidentifiable Shares of Stocks

If the shares of stocks cannot be properly identified,

the following rules are applicable to compute the cost
of the shares of stocks:
Based on first-in, first-out (FIFO) method
Moving Average method, if the seller maintains books of
account of every transaction of a particular stock
If stock dividend is received, an allocated cost of the original
cost shall be assigned to the said stock dividends

Installment Sales of Shares of Stocks

The determination of the amount of tax due on the

installment receivable in the installment sales transaction of
shares of stocks shall be governed by the following rules:

Wash sales

WASH SALE is a sale or disposal of stock or

securities where substantially identical securities are
acquired within 61-day period, beginning 30 days
before the sale and ending 30 days after the sale
Substantially identical same
class or has similar important
features

Requisites of Wash Sales loss

1. The sale of the stock or securities is at a loss

2. Within 30 days before or after such sale, the seller
acquired by purchase or exchange substantially
identical security
3. The seller is not a dealer in stock or securities.

Treatment of Losses and Gains from Wash Sales

GENERAL RULE:
Losses are not
deductible while
Gains are taxable

 If the number of securities sold is more than the

number of securities purchased within 61-day period,
then:
No loss shall be recognized on the acquisitions within 61-day
period which are matched with the number of shares disposed
of; and
A capital loss shall be recognized on the number of shares
disposed of which cannot be matched with acquisitions within
61-day period

 If the number of securities sold is less than number of

securities purchased within 61-day period, then:
The stock disposed of will be matched with an equal number of
shares of stock acquired in accordance with the order of
acquisition beginning with the earliest acquisition

 To determine the amount of deductible wash sale loss

To determine the tax basis of reacquired shares

Cost of acquisition
xxx
Add: wash sale loss
xxx
Tax basis or adjusted cost
xxx

Short Sales

Short sales could either be:

Short sale of property, and
Failure to exercise privileges or option to buy or sell property

SHORT SALE OF PROPERTIES is made when a

speculator sells property which he does not own and
postpones their delivery to a later date when the
purchase price of the property is lower than the amount
he received from the sale to make a profit.

 FAILURE TO EXERCISE OPTION TO BUY OR SELL

PROPERTY happens when a taxpayer is provided for
an option period to buy capital property but such
privilege was not exercised, the option money shall
be considered a capital loss.

Securities Becoming Worthless

Ascertained to be worthless and written off;

The taxpayer owning the securities should not be a
bank
Written off amount is a capital loss

Liquidating Dividends

The gain realized or loss incurred by the stockholder

is taxable or deductible from capital gain as the
case may be.

Corporations Own Shares of Stock

As a rule, the original issue by a corporation of its

share of stock at more or less than the par or stated
value shall have no recognition of gain or loss.
Hence, it is not subject to capital gains tax.

 However, gain or loss incurred from dealings by a

corporation in its own capital stock transaction may
give rise to either taxable gain or taxable loss
based on transaction involving:
Receipt of own share in exchange for TS
Sale of treasury stock

Own Share Received in Exchange for Property

When a corporation received its own stock as

consideration for property sold or for payment of
indebtedness, it may give rise to a gain or loss to be
computed as though payment has been made in any
other property.

Sale of Treasury Stock

It may give rise to:

a taxable gain if treasury stock is subsequently reissued for a
consideration more than its cost
deductible loss if treasury stock is subsequently reissued for a
consideration less than its cost

Sale of Corporate Bonds

The issuance at face value does not give rise to

gain or loss but a gain or loss is recognized
when issued at a premium or a discount.

The gain or loss shall be based on the amortized premium or discount over the life of the bonds

Retirement of Bonds

The gain or loss on bond retirement shall be taxable

gain or deductible loss.

Interest in Partnership

The gain or loss on sale of partners interest in the

partnership is a capital asset transaction.

Abandoning Property for a Foreclosure Sale

When a taxpayer abandons property, the loss does

not result from a sale or exchange. However, if a
taxpayer abandons property for an ordinary loss and
sells it in a foreclosure proceeding, the loss incurred
in such sale is a capital loss.

Disguised Sale

A DISGUISED SALE is a sale or exchange between

two parties with the intent of partly sale and partly
gift.

Corporate Reorganization

Rules:
Nonrecognition of gain or loss if exchange of property is SOLELY
IN SHARES OF STOCK:
Corporation to corporation (both party to merger or
consolidation)
Shareholder to corporation (party to the merger or
consolidation)
Security holder of a corporation to corporation
A person exchanges his property for stock of unit of
participation in a corporation of which result of such
exchange said person, alone or together with others, gain
control of said corporation

 Recognition of gain but not loss if:

An individual, a shareholder, or a corporation received cash or
property. The gain to recognize should not exceed the sum of
money and the fair market value of the property received.
As to the shareholder, if the money and/or property received
have the effect of distribution of a taxable dividend, there shall
be taxed as dividend to the shareholder an amount of the gain
recognized limited to his proportionate share of the
undistributed earnings and profits of the corporation.

 Basis of the stock received would be:

Cost of the stock transferred
xxx
Less: Money received
xxx
FMV of property received
xxx
xxx
Balance
xxx
Add: gain recognized on the exchange
xxx
amount treated as dividend
xxx
xxx
Basis or cost of stock received
xxx

Sale of Patents and Copyrights

The gain or loss arising from the sale of patents and

copyrights is determined by computing the
difference between selling price and costs.

Sale of Goodwill

The gain or loss arise only when the business to

which goodwill is attached is sold. It is determined by
comparing the sales price with the cost or other
basis.