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MODULE 7 Dealings in Property: Capital Gains,

Capital Loss, And Capital Gains Tax

Objectives:
After this topic, the students are expected to be able to:
1. Identify and distinguish ordinary assets and capital assets
2. Memorize the two types of capital gains subject to capital gains tax and their
corresponding tax rates and tax bases
3. Distinguish capital gains subject to regular tax from those subject to capital gains tax.
4. Master the procedural computation of the 5 and 10% capital gains tax and the 6%
capital gains tax.
5. Master the rules on wash sales and tax-free exchanges
6. Master the exceptions to the 6% capital gains tax
7. Be able to determine the et capital gains or loss that will be included in the basic tax
computation.

CLASSIFICATION OF TAXPAYER’S PROPERTIES

1. Ordinary assets – assets used in business and are basically the a) assets held for sale,
such as inventory; and b) assets held for use-such as supplies and items of property,
plant and equipment like buildings, property improvements, and equipment.

2. Capital assets – any asset other than ordinary assets. They can be further classified as
a) Personal assets (non-business) assets of individual taxpayers and b) Business assets
of any taxpayers which could be financial assets – such as cash, receivables, prepaid
expenses, and investments; and intangible assets- such as patent, copyrights, leasehold
rights, and franchise rights.

CLASSIFICATION OF PROPERTIES HELD BY TAXPAYERS (Banggawan)

A. INDIVIDUAL TAXPAYERS

INDIVIDUAL TAXPAYERS

Personal asset Business asset

(All are capital assets)

Ordinary assets Capital assets

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B. CORPORATE TAXPAYERS

CORPORATE TAXPAYERS

Ordinary assets Capital Assets

CONCEPT CHECK (Tabag & Garcia)

Classify the following as ordinary or capital assets:
1. Stock and securities held by taxpayers as investment.
2. Stock and securities held in 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.

Asset Classification Rules

1. Property purchased for future use – ordinary asset, even though this purpose is later
thwarted by circumstances beyond the taxpayer’s control.
2. Discontinuance of the active use of the property – does not change its character
previously established as a business property.
3. Real property used, being used, or have been previously used in trade of the taxpayer-
ordinary assets
4. Properties classified as ordinary assets for being used in business by a taxpayer not
engaged in the real estate business are automatically converted to capital assets upon
showing of proof that the same have not been used in business for more than 2 years
prior to the consummation of the taxable transaction involving such property.
5. Depreciable asset- an ordinary asset even if it is fully depreciated, or there is a failure
to take depreciation during the period of ownership.
6. Real properties used by exempt corporations in its exempt operations- considered as
capital assets
7. Property transferred by sale, barter or exchange, inheritance, donation, or declaration
of property dividends shall depend on whether or not the acquirer uses it in business.
8. Real properties subject of involuntary transfer such as expropriation and foreclosure
sale – the involuntariness of the sale shall have no effect on the classification of such
real property.
9. Change in business- from real estate to non-real estate business shall not change the
classification of ordinary assets previously held.

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Types of Gains on Dealings in Properties

1. Ordinary gain – arises from the sale, exchange, and other disposition including pacto
de retro sales and other conditional sales of ordinary assets.
2. Capital gain – arises from the sale, exchange, and other disposition including pacto de
retro sales and other conditional sales of capital assets.

Taxation of sales on Dealings in Properties

Type of gain Applicable Taxation Scheme
Ordinary gains Regular income tax
Capital gains General Rule: Regular income tax
Exception rule: Capital gains tax

Capital gains Subject to Capital Gains Tax

There are only two types of capital gains subject to capital gains tax:
1. Capital gains on the sale of domestic stocks sold directly to buyer
2. Capital gains on the sale of real properties not used in business

Scope of Capital Gains Taxation

Gains on Dealings in Capital assets Tax Rates
• Gain on the sale, exchange, and 15% Capital Gains Tax
other disposition of domestic stocks
directly to buyer
• Sale, exchange, and other 6% Capital Gains Tax
disposition of real property in the
Philippines
• Gains from other capital assets Regular Income Tax

Capital gain on the Sale, Exchange and other Disposition of Domestic Stocks
Directly to Buyer

Domestic stocks are evidence of ownership or rights to ownership in a domestic

corporation regardless of its features, such as:
1. Preferred stocks (participative, cumulative, etc.)
2. Common stocks
3. Stock rights
4. Stock options
5. Stock warrants
6. Unit of participation in any association, recreation, or amusement club ( golf, polo, or
similar clubs)

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The capital gains tax does not only cover sale of domestic stocks for cash but
also include:
a. Exchange of domestic stocks in kind, and other dispositions such as:
b. Foreclosure of property in settlement of debt
c. Pacto de retro sales – sale with buy back agreement
d. Conditional sales – sales which will be perfected upon completion of
certain specified conditions
e. Voluntary buy back of shares by the issuing corporation – redemption
of shares which may be re-issued and not intended for cancellation

Modes of Disposing Domestic Stocks

Shares of stocks may be sold, exchanged, or disposed:
1. Through the Philippine Stock Exchange (PSE) – not subject to capital gains tax, but
rather is subject to a stock transaction tax of 60% of 1% of the selling price effective
January 1, 2018.
2. Directly to buyer- subject to capital gains tax

Nature of the Capital Gains Tax

1. Universal Tax
✓ Applies to all taxpayers disposing stocks classified as capital assets regardless
of classification of the taxpayer.
✓ The gain on the sale of domestic stocks is within, but the tax applies even if
the sale is executed outside the Philippines
2. Annual Tax
✓ It is imposed on the annual net gain on the sale of domestic stocks directly to
buyer.

Net gain is determined as follows:

Pxxx,xxx
Selling price
Less:
Basis of stocks disposed Pxxx,xxx
Selling expenses xxx,xxx
Documentary stamp tax on the sale* xxx,xxx xxx,xxx
Net capital gain (loss) Pxxx,xxx
*The documentary stamp tax is deducted if paid by the seller.

Selling price shall mean:

a. If cash sale – the total consideration received per deed of sale
b. If paid partly in money and partly in property – the sum of the money and the fir value
of the property received
c. In case of exchanges – the fair value of the property received

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Basis of Stocks Disposed

a. If acquired by purchase- tax basis is the cost of the property which will be determined
by the following methods in descending order of priority:
1. Specific identification – if the shares can be specifically identified
2. Moving average method – if books of accounts are maintained by the seller
where transactions of every particular stock is recorded
3. First-in, First-out method, if the stocks cannot be specifically identified.
b. If acquired by devise, bequest, or inheritance – the tax base is the fair value at the
time of death of the decedent
c. If acquired by gift – the tax basis is the lower of the fair market value at the time of
gift and the basis in the hands of the donor or the last preceding owner by whom it
was not acquired by gift.
d. If acquired for inadequate consideration – the tax basis is the amount paid by the
transferee for the property.
e. If acquired under tax-free exchanges, the tax basis is the substituted basis of the
stocks.

The Capital Gains Tax Rate

a. For foreign corporation taxpayers – 5% for net gain up to P100,000
- 10% for excess net gain above P100,000
b. Individuals and domestic corporations – 15% Capital Gains Tax

COMPUTATION OF THE CAPITAL GAINS TAX UNDER THE TRAIN LAW

Illustrative Problem 7-1:

A taxpayer disposed its investments in domestic stocks costing P100,000 directly to a
buyer. It paid on the sale P2,000 and P500, respectively, for broker’s commission and
documentary stamp tax expense.

Assuming the Taxpayer is an Individual or domestic corporation:

A. Selling price = P180,000
Selling Price P180,000
Less: Cost & Expenses
Purchase cost P100,000
Commission expense 2,000
Documentary stamp tax exp. 500 102,500
Capital Gain P 77,500

Capital gains tax Due:

P77,500 x 15% = P11,625

B. Selling price = P240,000

Selling price P240,000
Less: Cost & Expenses* (same as above) 102,500
Capital gain P137,500

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C. Capital gains tax due:

P137,500 x 15% = P 20,625

Assuming the taxpayer is a foreign corporation, the capital gains tax due from him shall be
computed as follows:
A. Capital gain of P77,500
Capital gains tax due shall be computed as follows:
First P100,000 of capital gain P77,500
Multiply by applicable tax rate 5%
Capital gains tax due P3,875

B. Capital gain of P137, 500

Capital gains tax due shall be computed as follows:
First P100,000 P100,000
Tax rate 5% P5,000
PLUS
Excess gain on P100,000 P 37,500
Tax rate 10% 3,750
Capital gains tax due P8,750

TAX COMPLIANCE
There are two aspects of compliance under the law:
1. Transactional capital gains tax – where the capital gains or losses are required to be
reported after each sale, exchange, and other dispositions through the capital gains tax
return (BIR Form 1707).
The capital gains tax return shall be filed within 30 days after each sale,
exchange, and other disposition of stocks. If the tax is qualified for payment under
the installment method, the tax is due within 30 days after each installment.

2. Annual capital gains tax – the CGT is recomputed on the annual net gains then
previous tax payments are treated as tax credit thereto. After such credit, a residual
tax due is paid while excess transactional payment is claimed as TAX REFUND or
TAX CREDIT.
The deadline for the annual capital gains tax return, BIR Form 1707-A, shall
be files on or before the 15th day of the 4th month following the close of the taxable
year of the taxpayer.

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Illustrative Problem 7-2. Annual Capital Gains Tax for Foreign Corporations
Assume a foreign corporation had the following disposition of several equity
securities directly to a buyer for the fiscal year ending June 30, 2020:

Date Equity Securities Selling Cost & Capital Capital

Price Expenses Gain Gains Tax
(Loss)
1/12 Preferred stock P210,000 P100,000 P110,000 P6,000
3/18 Common stocks 80,000 90,000 (10,000) -
5/14 Stock rights 160,000 70,000 90,000 4,500
6/17 Stock options 80,000 100,000 (20,000) -
Total P170,000 P10,500

Under the NIRC, the final capital gains tax payable (refundable) shall be:
Annual net capital gain P170,000
Less: First P100,000 net gain 100,000 x 5% P5,000
Excess net capital gain 70,000 x 10% 7,000
Annual capital gains tax due P12,000
Less: Total transactional capital gains taxes paid 10,500
Capital gains tax payable (refundable) P1,500

Illustrative Problem 7-3. Annual Capital Gains Tax for Individuals and
Domestic Corporations
Assume an individual taxpayer had the following transactions during the year:

Date Equity Securities Selling Cost & Capital Capital

Price Expenses gain (loss) gains tax
1/12 Preferred stock P210,000 P100,000 P110,000 P16,500
3/18 Common stocks 80,000 90,000 (10,000) -
5/14 Stock Rights 160,000 70,000 90,000 13,500
6/17 Stock Options 80,000 100,000 (20,000) -
Total P170,000 P30,000

Annual Capital Gains Tax Due (Refundable) computation:

Annual net capital gain P170,000
Multiply by: CGT rate 15% P25,500
Less: Total Transactional capital gains taxes paid 30,000
Capital Gains tax payable (Refundable) (P 4,500)

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INSTALLMENT PAYMENT OF THE CAPITAL GAINS TAX

When domestic stock is sold in installments, the capital gains tax may also be paid in
installments if the:
1. Selling price exceeds P1,000; and
2. Initial payment does not exceed 25% of the selling price

✓ Under the installment method, the tax will be paid based on the pattern of
collection of the contract price. The contract price is the total sum of money
collectible from the contract. It is normally the selling price in the absence of
any indebtedness on the shares sold.

✓ Under the installment method, the capital gains tax payable every installment
shall be computed as:

(Collection/Contract Price ) * Capital Gains Tax

Illustrative Problem 7-4

On November 1, 2019, Mr. Batanes made a sale of domestic stocks costing P700,000
directly to a buyer for P1,000,000. The buyer agreed to pay in P100,000 monthly installments
starting November 30.

Selling price P1,000,000

Less: Cost of shares sold 700,000
Net Capital gain P300,000
Multiply by: 15%
Net Capital gains tax due P45,000

A. No mortgage on the shares sold

✓ Initial payment:
First installment (November 30) P100,000
Second installment (December 31) 100,000
Total initial payment P200,000

✓ Ratio of initial payment (P200,000/P1,000,000) = 20%

Since the initial payment did not excess 25% of the selling price, the taxpayer
is qualified to pay capital gains tax by installment.

✓ Capital gains tax payable for every installment:

(100,000/P1,000,000) x P45,000 = P4,500

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B. With mortgage on stocks but not in excess of cost

Assume the stocks were previously mortgaged for P600,000 which the buyer
assumed. The P400,000 balance is payable in monthly installments of P100,000
starting November 30, 2019.

The gain and the capital gains tax shall be the same as P300,000 and P45,000
respectively.
✓ The contract price or total sum collectible on the sale shall be:
Selling price P1,000,000
Less: Mortgage assumed 600,000
Contract price P 400,000

✓ The capital gains tax payable every installment shall be computed as follows:
(P100,000/P400,000) x P45,000 = P11,250

C. With excess mortgage over cost

Assume that the stock was subject to P750,000 mortgage which the buyer
assumed. The P250,000 balance is payable in monthly installments of P50,000
starting November 30, 2019.

The gain and the capital gains tax shall be the same as P300,000 and P45,000
respectively. The excess of mortgage over the basis of the stocks is an indirect down
payment, a form of constructive receipt.
1. Compute the contract price
Selling price P1,000,000
Less: Mortgage assumed 750,000
Cash collectible P 250,000
Constructive receipt
(750K mortgage-700k basis) 50,000
Contract price P 300,000

2. Compute the initial payment

Indirect downpayment (constructive receipts) P 50,000
First installment (November 30) 50,000
Second installment (December 31) 50,000
Total initial payment P150,000

Ratio of initial payment (150,000/1,000,000) = 15%

Since the initial payment is only 15%, the taxpayer is qualified to pay
capital gains tax in installments.

The capital gains tax shall be computed as follows for every installment:
50,000/300,000 x P45,000 = P7,500

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SPECIAL TAX RULES ON CAPITAL GAIN OR LOSS MEASUREMENT

1. Wash sales of stocks
2. Tax-free exchanges
a. Exchange of stocks pursuant to a merger or consolidation
b. transfer of stocks resulting in corporate control

Wash Sales Rule

Wash sales – deemed to occur when within 30 days before and 30 days after the
losing sale of securities (also referred to as the 61-day period), the taxpayer acquired or
entered into a contract or option to acquire the same or substantially identical securities.
The wash sales rule has significance on the recognition of reportable capital losses on
domestic stocks sold directly to buyer.
• The wash sale rule is intended to prevent taxpayers from feigning temporary losses
which could enable them to manipulate their reportable taxable net gain.
• Capital losses on wash sales by non-dealers in securities are not deductible against
capital gains because they are effectively unrealized. The immediate reacquisition of
the shares makes the loss a theoretical or a feigned loss.

30 Days Day of losing sale 30 Days

Securities – for purposes of the 61-day rule include stocks and bonds. For the purpose of this
rule, substantially identical means that stocks or bonds of the same class with the same
features. A common stock is not substantially identical to a preferred stock. Participating
and non-participating preferred stocks are not substantially identical.

Illustrative Problem 7-5

A. Acquisition of identical shares before a losing sale
In 2020, Mr. Toledo had the following transactions in the shares of Talisay, Inc., a
domestic corporation:

Date Transaction Shares Price Cost

January 5 Purchase 10,000 P4.00 P40,000
March 1 Purchase 10,000 4.10 41,000
March 18 Sale* 10,000 3.80
Mr. Toledo uses the FIFO Method in costing security transactions.

Under the FIFO method, the 10,000 shares sold in march 18 came from the first 10,000
shares bought on January 5. The capital gain or loss on March 18, 2020 shall be computed as
follows:
Selling price P38,000
Less: Cost of shares sold (from January purchase) 40,000
Capital Loss P 2,000

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Take Note:
• Pursuant to the wash sales rule, the P2,000 capital loss on the sale shall not be
deductible in the computation of the annual net capital gains in 2020 since the shares
sold were fully replaced within the 61-day period.
• There is FULL REPLACEMENT or FULL-COVER-UP when the quantity of the
shares acquired in the 61-day period is at least equal to the quantity of the shares sold.
• The loss shall be deferred and added to the tax basis of the replacement shares
because the loss is a fake loss since the taxpayer bought back his original position
putting him in the same position as before (i.e. still owning 10,000 shares)
• The adjusted basis of the replacement shares acquired on March 1, 2020 shall be:
Purchase price P41,000
Add: Deferred loss on march 18 wash sales 2,000
Basis of replacement shares P 43,000

B. Replacement shares are less than the shares sold

Assume that the shares bought on march 1, 2020 were only 8,000 shares for P32,800.

• Only the portion covered with replacement shares shall be disallowed. The portion
without replacement cover is a deductible realized loss. Thus, the capital loss shall be
split as follows:
Deferred Loss (8,000 shares/10,000 shares x P2,000) P1,600
Deductible loss (2,000 shares/10,000 shares x P2,000) 400
Capital loss P2,000
• The adjusted basis of the replacement shares acquired on March 1, 2020 shall be:
Purchase price P32,800
Add: Deferred loss on March 18 wash sales 1,600
Basis of 8,000 replacement shares P34,400

C. Assuming that by specific identification, the 10,000 shares bought on March 1, 2020 were
the same shares sold at a loss on March 18, 2020?
• Note that wash sales involve the 1) sale of shares at a loss, but 2) the same shares
were effectively re-acquired before or after the sale by a covering acquisition.
• In this case, the P2,000 capital loss is NOT A WASH SALE loss since THERE IS NO
ACQUISITION OF REPLACEMENT shares within the 61-day period.
• Hence, the capital loss is deductible against capital gains.

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CONCEPT CHECK 7-2:

Problem 1 In 2020, Mr. Ben had the following transactions in the stocks of Catarman
Corp., a domestic Corp:
Date Transaction Shares Price Cost
January 4 Purchase 10,000 P20.00 P200,000
February 28 Sale 10,000 18.00 180,000
March 4 Purchase 12,000 16.00 192,000

Required:
a. Compute for the capital gains or loss
b. Compute for the basis of the replacement shares.

Problem 2. Same details as in Problem 1 above, but assuming that ONLY 7,000 shares were
bought on March 4 for P110,000.

Required:
a. Compute for the capital loss
b. How much is the deferred loss? The deductible loss?
c. How much is the adjusted basis of the replacement shares acquired on March 4, 2020.

Problem 3. In 2020, Mr. Ty had the following transaction in the shares of Narra
Corporation, a domestic corporation:
Date Transaction Shares Price/share Value
January 4 Purchase 15,000 P 20.00 P300,000
February 15 Purchase 5,000 21.00 105,000
February 28 Sale* 12,000 18.00 216,000
March 4 Purchase 3,000 16.00 48,000
April 1 Purchase 7,000 14.00 98,000

Required:
a. Assuming that the shares sold on February 28 were the shares bought on January 4,
2020. How much is the capital loss?
b. How much of the above loss is to be deferred? How much is the deductible loss?
c. What is the adjusted basis of the replacement shares acquired on February 15, 2020?
d. What is the adjusted basis of the replacement shares acquired on March 4, 2020?

Problem 4. On January 18, 2020, Mr. Mendez bought 10,000 shares of Gen. Luna Corp.
for P100,000. On February 6, 2020, he sold the same shares for P95,000. On March 28,
2020, he bought 5,000 shares for P55,000.
a. How much is the capital loss?
b. How much is the deferred loss? The deductible loss?
c. How much is the basis of the shares bought on March 28, 2020?

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TAX FREE EXCHANGES

1. Merger or consolidation – the gain or loss on share-for-share swaps pursuant to a plan
of merger or consolidation will not be recognized for taxation purposes. It is because
in effect, the transaction merely involves a replacement of shares of stocks of the
shareholders of the absorbed corporation with them being simply integrated as
shareholders of the acquiring corporation.

2. Initial acquisition of control – no gain or loss shall also be recognized if property is

transferred to a corporation by a person in exchange for the stocks or units of
participation in such as corporation of which as a result of such exchange, said person,
alone or together with others (but not exceeding four), gains control of said corporation.

3. Exchange not solely for stocks – if stocks are exchanged not solely for stocks but with
other considerations such as cash and other properties- the gains BUT NOT LOSSES
are recognized up to the extent of cash and other properties received.

Illustrative Problem 7-6

Assume that pursuant to the plan of merger between Caritas Inc. and
Benevolence Inc., Mr. Santillan was required to surrender his Caritas Inc. shares costing
P1,000,000 in exchange for Benevolence Inc. shares with total fair value of P900,000
plus P100,000 cash and P200,000 worth of goods.
Total consideration received or selling price
(P900,000 + P100,000 + P200,000) P1,200,000
Less: Cost of stocks exchanged 1,000,000
Indicated gain/realized return on capital P 200,000

Return of capital
Cost of Caritas Inc. shares P1,000,000
Fair value of Benevolence Shares 900,000
Return of Capital (Cash received) 100,000
Total cash and other properties received P 300,000

Regulatory Formula on tax Substituted Basis

Tax basis of old shares exchanged Pxxx,xxx
Add: Gain recognized on the transfer xxx,xxx
Less: Cash or other properties received xxx,xxx
Tax basis of new shares received Pxxx,xxx

Hence, using the formula to compute the tax basis of the shares received
(Benevolence, Inc.) by Mr. Santillan:
Tax basis of Caritas(old) shares P1,000,000
Add: Gain recognized on the transfer 200,000
Less: Cash or other properties received 300,000
Tax basis of Benevolence shares received P 900,000

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Illustrative Problem 7-7. Indicated Gain Exceeds Cash and Other

Properties Received
Assume that pursuant to the plan of merger between Caritas Inc. and
benevolence Inc. Mr. Santillan was required to surrender his Caritas, Inc. shares costing
P1,000,000 in exchange for Benevolence shares with total fair value of P1,050,000 plus
P150,000 cash.

Total consideration received or selling price

(P1,050,000 + P150,000) P1,200,000
Less: Cost of stocks exchanged 1,000,000
Indicated gain P 200,000

The indicated gain is recognized to the extent of the cash and/or other properties received.
Hence, indicated gain is considered as follows:
Indicated Gain P200,000
Less: Realized gain (value of cash and other properties received) 150,000
Unrealized Return on Capital P 50,000

The substituted tax basis of the Benevolence shares received shall be computed as follows:
Tax basis of the Caritas shares exchanged P1,000,000
Add: Gain recognized on the transfer 150,000
Less: Cash or other properties received 150,000
Tax Basis of the Baler shares received P1,000,000

TAX ISSUE: SALE OF STOCKS DIVIDEND-ON TO A CORPORATE BUYER

Dividends may escape taxation when stocks are sold dividend-on by individual
taxpayers to a corporate buyer between the date of declaration and the date of record. At the
date of record, the corporate buyer will be listed as shareholder in the corporate books and will
not be subjected to the 10% dividend tax.

Illustration 7-8: Sale of stocks dividend-on (to individuals)

Ms. Pearl owns 10,000 P10-par value shares of Zebra, a domestic corporation. On
February 14, 2016, Zebra declared a dividend of P2/share with record date of March 2016 and
payment date of April 20, 2016. On February 18, 2016, Ms. Pearl sold all the shares for P15
per share directly to Mr. LayLow. The selling expenses were P4,000.
The capital gains shall be determined as follows:

Total selling price (P15 x 10,000) P 150,000

Less: Cost and expenses (P10 x 10,000)+P4,000 104,000
Net dividend receivable (P2x10,000x90%) 18,000
Capital Gains P 28,000

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It should be noted that the dividends to be received by Pearl is net of the 10% final
withholding tax on dividends of individual tax payers.

Illustration 7-9: Sale of stocks dividend-on (to corporate buyer)

• Dividends may escape dividend taxation, since corporations are not subject to the 10%
dividends tax, and as of the date of record, the corporate buyer will be listed as the
shareholder in the corporate books of the distributing corporation.
• Capital gains shall be computed as follows:
Total selling price (P15 x 10,000) P150,000
Less: Cost and expenses (P10 x 10,000) + P4,000 104,000
Dividend receivable (P2 x 10,000 x 100%) 20,000
Capital gains P 26,000

How should the dividend on the stocks sold be taxed?

Under the NIRC, all income not expressly exempted or not subjected to final tax or
capital gains tax must be included in gross income subject to regular income tax. The
individual seller shall report the P20,000 domestic dividend in gross income subject to regular
income tax.

PERSONS NOT LIABLE TO THE 15% CAPITAL GAINS TAX

1. Dealers in securities
2. Investors in shares of stocks in a mutual fund company in connection with gains
realized upon redemption of stocks 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, such
as:
a. Foreign governments and foreign government-owned and controlled corporations
b. Qualified employee trust funds

SALE, EXCHANGE, AND OTHER DISPOSITION OF REAL PROPERTY

CLASSIFIED AS CAPITAL ASSET LOCATED IN THE PHILIPPINES

The sale, exchange, and other disposition of real property capital assets in the
Philippines is subject to a tax of 6% of the selling price or the fair value, WHICHEVER IS
HIGHER.
Under the NIRC, the Fair Value is WHICHEVER IS HIGHER of the
a. Zonal value and
The value prescribed by the Commissioner of Internal Revenue for real
properties for purposes of enforcement on internal revenue laws

b. Fair market value

The market value shown in the schedule of market values of the Provincial and
City assessors.

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For lands, the capital gains tax is 6% of whichever is the highest of the selling price
(bid price in the case of foreclosure sales), zonal value, or Provincial or City Assessor’s fair
value

Nature of the 6% Capital Gains Tax

a. Presumption of capital gains
• The 6% capital gains tax applies even if the sale transaction resulted to a loss.
• The basis of taxation is the selling price or fair value whichever is higher, not
the actual gain.
b. Non-consideration to the involuntariness of the sale
• The CGT applies even if the sale is involuntary or is forced by circumstances
(i.e. expropriation sale, foreclosure sale, dispositions by judicial order, and
other forms of forced disposition.
• It also applies to conditional sales and pacto de retro sales
c. Final Tax
• The capital gains tax shall be withheld by the buyer against the selling price of
the seller and remit the same to the government.

SCOPE AND APPLICABILITY OF THE 6% CAPITAL GAINS TAX

Location of the Property Taxpayers
Individuals Corporations
Within the Philippines All individuals Domestic Corporation only
Outside the Philippines Not applicable Not applicable
In cases where foreign corporations realize gains from the sale of real property
classified as capital assets, the capital gain shall be subject to the regular income tax.

EXCEPTIONS TO THE 6% CAPITAL GAINS TAX

1. Alternative taxation rule
2. Exemption rules
a. Exemption under the NIRC
b. Exemption under the special laws

Alternative taxation
An individual seller of real property capital assets has the option to be taxed at either:
a. 6% capital gains tax
b. The regular income tax

It should be noted that alternative taxation is permissible only when:

1. The seller is an individual taxpayer; and
2. The buyer is the government, its instrumentalities or agencies including government-
owned and controlled corporations

Basis of Alternative Taxation

The alternative taxation is intended to ease the burden of government expropriation
where taxpayers may incur losses on the forced expropriation sale and are still required to
pay tax.
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EXEMPTION TO THE 6% CAPITAL GAINS TAX UNDER THE NIRC

The sale, exchange and other disposition of a principal residence for the reacquisition
of a new principal residence by individual taxpayers is exempt from the 6% capital gains tax.

Principal residence- means the house and lot which is the primary domicile of the
taxpayer. If the taxpayer has multiple residences, his principal residence is deemed that one
shown in his latest tax declaration.

Requisites of Exemption:
1. The seller must be a citizen or resident alien.
2. The sale involves the principal residence of the seller-taxpayer.
3. The proceeds of the sale is utilized in acquiring a new principal residence.
4. The BIR is duly notified by the taxpayer of his intention to avail of the tax exemption
within 30 days of the sale through a prescribed return (BIR Form 1706) and “Sworn
Declaration of Intent.”
5. The reacquisition of the new residence must be within 18 months from the date of sale.
6. The capital gain is held in escrow in favor of the government.
7. The exemption can only be availed of once in every 10 years.
8. The historical cost or adjusted basis of the principal residence sold shall be carried over
to the new principal residence built or acquired.

It must be emphasized that the sale of principal residence must preceded the acquisition of
the new principal residence to be exempt (BIR Ruling No. 038-2015).

Illustrative Problem 7-10

Helen sold her principal residence with a fair market value of P6,000,000 for
P5,000,000. Helen purchased the residence for P3,000,000 several years ago. The imposable
capital gains tax is 6% of P6,000,000 or P360,000.

Helen should indicate her intention to apply for exemption in the capital gains tax return
to be files and submit a Sworn Declaration of Intent. She will be required to deposit the
P360,000 capital gains tax in an ESCROW ACCOUNT in favor of the government.

A. Full utilization of proceeds – Exempt from CGT

Assuming Helen acquires a new principal residence for P5,200,000 within 18
months, the previous sale transaction will be exempt from the capital gains tax.
Hence, the P360,000 capital gains tax in escrow will be released to her.

If, however, Helen did not acquire a new principal residence within 18
months, the capital gains tax in escrow will be taken by the government.

• Basis of the new residence

Basis of old residence P3,000,000
Add: Additional out-of-pocket costs (P5.2M-P5M) 200,000
Basis of new residence P3,200,000

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B. Partial utilization of proceeds- Partially Exempt

Assume Helen uses only P4,500,000 out of the P5,000,000 proceeds in
acquiring her new residence. The portion representing the unused proceeds
shall be subject to tax. The capital gains tax held in escrow account including
any accrued interest shall be allocated as follows:

To Helen P324,000 (4.5M/P5M) x P360,000

To the government 36,000 (P0.5M/P5M) x P360,000
Total amount in escrow P360,000

Any interest which might have accrued on the escrow fund shall be released to
the taxpayer. The government is entitled to the amount of the unpaid tax only.

Tax basis of the new residence:

P3,000,000 x (4,500,000/5,000,000) = P2,700,000

C. Alberto sold his residential lot with fair value of P1,000,000 for P2,000,000. He
purchased a new residence for P1,500,000 within 18 months. Is Alberto required to pay
the capital gains tax?
Alberto will be required to pay P120,000 (P2,000,000 x 6%) capital gains tax
whether or not he utilized the proceeds to acquire a new residence. Note that
the exemption rule envisages a sale of a principal residence for the acquisition
of a new principal residence.

D. Afraid of ghosts that frequently appear in his mansion residence, Raymund left his
mansion and bought a new home for P17,000,000 as his principal residence. Within 3
months, Raymund was able to sell his mansion for P40,000,000. Is Raymund exempt
from the CGT?
Yes. The sale of the mansion will be subject to 6% capital gains tax. For
purposes of the exemption, the sale of the old residence must precede the
purchase of the new residence.

CAPITAL GAINS TAX EXEMPTION UNDER SPECIAL LAWS

1. Sale of land pursuant to the Comprehensive Agrarian Reform program- sale
transaction between the land-owner and the tenant-buyer.

2. Sale of socialized housing units by the National Housing Authority – this exemption is
limited to socialized housing units only. The BIR ruled that the sale of the NHA of
commercial lots which is not part of the socialized housing project for the poor and
homeless is subject to capital gains tax or regular tax and documentary stamp tax.
To qualify for exemption, the socialized housing units of the NHA must
comply with price ceilings set by the NIRC and other special laws.

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PAYMENT OF THE 6% CAPITAL GAINS TAX IN INSTALLMENT

• The capital gains tax may be paid in installment if the initial payment does not
exceed 25% of the selling price.
• The initial payment – refers to the collections in the taxable year the sale is
made.

Illustrative Problem 7-11. Without mortgage

Assume that on December 1, 2016, Ms. Bea sold for P4,000,000 an unused lot with a
cost and fair value of P2,000,000 and P5,000,000, respectively. The buyer agreed to pay
P500,00 monthly installments starting December 31, 2016.
Capital gains tax - P5 Million x 6% = P300,000
Initial payment (December installment) 500,000
Ratio of initial payment - P500K/4M = 12.5%
• The installment sale qualifies under the ratio ceiling; hence the capital gains
tax can be paid in installment
• The capital gains tax payable every installment shall be computed as:
(P500,000/P4,000,000) x P300,000 = P37,500

Illustrative Problem 7-12. With Mortgage not in Excess of Cost

Assume that the lot in the previous illustration is mortgaged for P1,000,000 which the
buyer assumed and the buyer agreed to pay the P3,000,000 balance in p300,000 monthly
installments stating December 31, 2016.

Capital gains tax – 5M x 6% = P300,000

Initial payment (December installment) 300,000
Ratio of initial payment (P300,000/P4M) 7.5%

The contract price shall be computed as follows:

Selling price P4,000,000
Less: Mortgage assumed by buyer 1,000,000
Contract price P3,000,000

The capital gains tax payable every installment shall be computed as follows:
(300,000/3,000,000) x P300,000 = P30,000 capital gains tax on installment payment.

Illustrative Problem 7-13. With mortgage in excess of cost

Assume further that the lot is mortgaged for P2,500,000 which the buyer assumed and
the buyer agreed to pay the P1,500,000 balance in P300,000 monthly installments starting
December 31, 2016.
a. Compute for the contract price
Selling price P4,000,000
Less: Mortgage assumed 2,500,000
Add: Constructive downpayment (excess mortgage)
P2.5M Mortgage – P2.0M Cost 500,000
Contract Price P2,000,000

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b. Initial payment will be:

Constructive downpayment (excess mortgage) P 500,000
December 31 installment 300,000
Initial payment P 800,000

Ratio of initial payment to the selling price:

800,000/4,000,000 = 20%
Since the installment plan qualifies under the ratio ceiling, the taxpayer is qualified to
pay the CGT in installment.

c. The CGT due every installment shall be:

For the sale: 500,000/2,000,000 x P300,000 = P75,000
For every installment 300,000/2,000,000 x 300,000 = 45,000

Illustration7-14. Initial payment exceeds 25% of selling price

Assume that the initial payment on the sale of the taxpayer exceeds 25% of the selling
price.
The sale would be taxed as if it were a cash sale. The capital gains tax shall be paid in
lump sum upon filing of the capital gains tax return. This applies without regard to whether
or not any mortgage on the property exceeds the cost of the property disposed.

Deadline for the payment of the capital gains tax

The 6% capital gains tax will be filed through BIR Form 1706 and is due within 30
days from the date of sale or exchange. For the foreclosure sale, it is due from the expiration
of the applicable statutory redemption period. When the ta on the sale is qualified for
installment payment, it is due 30 days upon receipt of every installment .

BIR Tax Clearance

No registration of any document transferring real property shall be effected by the
Register of Deeds unless the Commissioner or his duly authorized representative has certified
that such transfer has been reported, and the capital gains or creditable withholding tax, if
any, has been paid. [Sec. 58(E), NIRC]. The certificate for purposes of this legal requirement
is referred to as the “Certificate Authorizing Registration (CAR)”

DOCUMENTARY STAMP TAX ON THE SALE OF CAPITAL ASSETS

a. Documentary stamp tax on the sale, exchange, and other dispositions of domestic
stocks directly to a buyer
The sale of domestic stocks is subject to a documentary stamp tax of P1.50 for
every P200 of the par value of the stocks sold (RA 9243).

b. Documentary Stamp Tax on the sale of real properties

The sale of real property capital assets is subject to a documentary stamp tax
on the gross selling price or fair market value whichever is higher.
The documentary stamp tax is P15 for every P1,000 and fractional parts of the
tax basis thereof. However, if the government is a party to the sale, the basis shall be
the consideration paid.

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COMPARISON OF THE 6% CGT AND 15% CGT

6% CGT 15% CGT
Tax Object Gain on Real property Gain on sale of stocks
Basis of the Tax Presumed gain Actual gain
Nature of the Tax Final tax Self-assessed tax
Frequency of Payment Per transaction Transactional and annual tax

OTHER DEALINGS IN PROPERTY

Applicable Income Taxes For Capital Gains & Ordinary Gains

TYPE OF GAIN APPLICABLE TAX
Capital gain on:
1. Sale of shares of domestic corporations Subject to 15% CGT on capital gain.
directly to a buyer. However, if the seller is a foreign
corporation, CGT IS 5% on the 1st P100,000
capital gain, 15% in excess of P100,000

2. Sale of shares of domestic corporations Not subject to income tax regardless of

through local stock exchange. 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 (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 Subject to 6% capital gains tax based on the
capital assets in the Philippines. highest amount among the selling price,
fair market value and zonal value.

4. Sale of real properties classified as Either 6% capital gains tax or basic tax at
capital assets in the Philippines to the the option of the taxpayer
government, its agencies or GOCCs by an
individual taxpayer.
5. All other types of capital gains other Subject to basic income tax. Part of the
than those enumerated in #1-4 taxpayer’s taxable income but subject to
rules on capital gains and losses as will be
discussed in the succeeding section.

ORDINARY GAIN Subject to basic tax. Part of the taxpayer’s

taxable income.

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CAPITAL GAINS SUBJECT TO ORDINARY OR BASIC INCOME TAX

All other 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 subject to basic tax. (Tabag & Garcia)
1. The transaction must involve property classified as capital asset.
2. The transaction must arise, generally, from sale or exchange.
3. a. Net capital gains are added to ordinary gains.
b. If the result is a net capital loss, such loss can only be deducted from the
capital gain
4. Holding period – refers to the length of time the asset was held by the taxpayer, which
covers the period from the date of acquisition to the date of sale or exchange.
a. Applicable only to individual taxpayers, estates and trusts.
b. The amount of capital gains and losses will 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%

c. The entire amount of capital gains and losses incurred by corporations shall be
recognized regardless of the holding period. Further, the rule that capital losses
are recognized only to the extent of capital gains shall likewise apply to
corporate taxpayers.

4. Net capital loss carry-over

a. This rule is applicable only to individual taxpayers.
b. 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.
c. The amount that can be deducted from the net capital gain of the succeeding
year SHOULD NOT BE IN EXCESS OF THE NET INCOME at the time the
capital loss was incurred.

The rules above do not apply to capital asset transactions involving real property and
shares of stock of domestic corporation as these are subject to final capital gains taxes.

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Cost Basis of Property Sold or Exchanged

Acquired by purchase Its cost (the purchase price plus expenses of acquisition)

Included in the inventory Its latest inventory value

Acquired by devise, Its fair market value as of the date of acquisition

bequest or inheritance
Acquired by gift or The same as if it would be in the hands of the donor or at last
donation preceding owner by whom it was not acquired by gift.
EXCEPT that if such basis is GREATER than the FMV of
the property at the time of the gift the, for the purpose of
determining loss, the basis shall be such FMV

Property (other than capital The amount paid by the transferee for the property OR the
asset) acquired for less transferor’s adjusted basis at the time of the transfer
than an adequate WHICHEVER IS GREATER.
consideration in money’s
worth

CONCEPT APPLICATION
Case 1. Holding Period-Individual taxpayer
An individual taxpayer, single, has the following date for 2018 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

How much is the net taxable income?

Case 2. Holding Period- Corporate Taxpayer

Assume the same data in Case A, except that the taxpayer is a corporation. Detrmine
the taxable income of the corporation.

Case 3. Holding Period & Net Capital “Loss” – Individual Taxpayer

An individual taxpayer, single, has the following data for 2018:
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?

Case 4. Net Capital “Loss” Carry Over- Individual taxpayer

Given the following data during the calendar year (2018), determine the taxable
income assuming the taxpayer is a citizen of the Philippines without a dependent child.

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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
corporation held for 6 months 150,000
Capital loss on sale of a car held for 10 months 50,000
Capital oss on sale of land in the Philippines held for 2 years 100,000
Capital loss in 2011 (net taxable income in 2011 was P100,000) 200,000

Case 5. Net Capital “loss” Carry-over (Individual Taxpayer)

Given the following data during the calendar year (2019) and assuming the taxpayer is
a citizen of the Philippines without a dependent child.
Business income P800.000
Business expense 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 150,000
held for 6 months
Capital loss on sale of a car held for two years 10,000
Capital loss on sale of land in the Philippines held for 2 years 100,000
Capital loss in 2018 (net taxable income in 2018 was P50,000) 200,000
Required: Determine the taxable income

Case 6. Taxpayer- domestic Corporation

Given the following data during the calendar year (2019) and assuming the taxpayer
is a “domestic corporation.”
Business income P800,000
Business 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 6 150,000
months
Capital loss on sale of land in the Philippines held for 2 years 10,000
Capital loss on sale of a car held for 2 years 100,000
Capital loss in 2018 (net taxable income in 2018 was P50,000) 200,000
Determine the taxable income of the taxpayer.

End of Topic
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References:

Banggawan, R.B. Income Taxation 2019 OBE Ed.

Tabag & Garcia. Income Taxation 2019 Ed.

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