DEALINGS IN PROPERTY

8/8/2019 DEALINGS IN PROPERTY

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DEALINGS IN PROPERTY


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CAPITAL ASSETS Means properly held by the taxpayer

whether or not connected with his tradeor business

Definition by exclusion approach


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ORDINARYASSETS Stock in trade or other property included in

inventory if on hand at the close of the

taxable year Property primarily for sale to customers in the

ordinary course of trade or business

Personal property used in the trade orbusiness and subject to depreciation

Real property used in trade or business


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STOCK IN TRADE OR OTHER

PROPERTY

Examples: Supplies on hand, merchandise inventory,raw materials, goods in process, and finished goods.

Stocks in trade take the category of ordinary assets.But if these are taken over by the estate upon thedeath of the owner, and by way of passive liquidationsells the inventoriable items included therein such

stocks in trade assume the character of capitalassets, unless the operation of the business iscontinued or extensive selling activities areconducted in order to make profits for the estate.


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PROPERTY PRIMARILY FOR

SALE CUSTOMERS

Examples: subdivision lots held for saleby the subdivision owner


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PERSONAL PROPERTY USED IN

BUSINESS

EXAMPLE: store and office equipment,delivery equipment of trucking business, and

the like. These properties are not intended for sale by

the business, either primarily or incidentally,but for use in the ordinary course of trade or

business. Must have an estimated useful life of more

than one year, hence, subject todepreciation.


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REAL PROPERTY USED IN

BUSINESS

Examples: land and buildings for rent andagricultural land used by the owner in his

farming business. Properties acquired for the purpose of being

used for commercial purposes are ordinaryassets although subsequently sold withouthaving been used for the purpose for which itwas originally intended, the nature of theproperty as an ordinary is not changed


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CAPITAL GAINS OR LOSSES Is due to a sale or exchange of a capital

asset.

Can either be short-term or long-termbased on its holding period.


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CAPITAL GAINS OR LOSSES LONG-TERM CAPITAL GAIN OR LOSS

The asset must be held for more thantwelve months.

SHORT-TERM CAPITAL GAIN OR LOSS

If the asset is held for twelve months or

less


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HOLDING PERIOD Length of time the asset has been held

by an individual taxpayer.

Covers the period from the date ofacquisition to date of sale.

Applicable only to individual taxpayer.

To determine the holding period, theday of acquisition is excluded and thedisposal date is included.


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PROPERTYRECEIVED FROM A

DECEDENT The basis of the property in determining

gain or loss from the sale or dispositionis the fair market price or value as ofthe date of acquisition.


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PROPERTYCONVERTED FROM PERSONAL

USE TO BUSINESS USE

When this occurs, the propertys basisfor computing depreciation is the lowerof the FMV or the adjusted basis of theproperty at the time the asset istransferred from personal use to an

income producing use or for use in atrade or business.


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ORDINARYGAINS AND

LOSSESAre gain or loss on sale or exchange

ordinary assets

If the property is being used fiftypercent of its time in business andother fifty percent for personal use, half

of the gain or loss on the sale orexchange is the ordinary and other halfcapital.


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DISTINCTIONS BETWEEN CAPITAL AND

ORDINARYGAINS

The sources of capital gains are sales orexchanges of capital assets while the sourcesof ordinary gains are ordinary businessassets.

The holding period is necessary for capitalassets (if taxpayer is individual and theproperty is not real property or certain shares

of stock), while this is not necessary inordinary assets; Capital gains may or may not be taxable in

full while ordinary gains are taxable in full.


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RULES ON CAPITAL ASSET

TRANSACTIONS

Capital losses are deductible only fromcapital gain.

Individual taxpayer can carry-over theloss in the succeeding year The capital loss to be carried over should

not exceed the net income for the year inwhich the loss was sustained

The carry-over of the net capital loss isgood only for one year.


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RULES ON CAPITAL ASSET

TRANSACTIONS If the taxpayer is individual,

Short-term: 100%-if the asset was held for not more thantwelve months

Long-term: 50%-if the asset was held for more than twelve

months Sale or disposition of real property by individual is

subject to 6% final tax Capital asset transactions of a corporation:

Holding period is not taken into account

The company cannot carry over the net capital loss Gain on sale of real property (except land and/or buildings)

is ordinary gain

Capital gains or losses of professional partnership willbe accounted for by the partners in proportion totheir interest in the partnership.


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ILLUSTRATIONIvan, married with one dependent child show thefollowing:

2009 2010Gross business Inc. 200,000 300,000

Deductions 90,000 100,000

Sale of capital assets (personal properties)


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ILLUSTRATIONCapitalasset

Cost Selling Price HoldingPeriod

Year of Sale

1 20,000 60,000 2 years 2009

2 200,000 45,000 6 months 2009

3 100,000 450,000 3 years 2010

4 130,000 80,000 14 months 2010


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Illustration: Requirements:

Determine taxable income of Ivan in 2009and 2010.

Determine taxable income in 2009 and2010 if Ivan is a domestic corporation.


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TRANSACTIONS RESULTING IN CAPITAL GAINSAND LOSSES EVEN IF NO SALE OF CAPITAL

ASSETS

Retirement of Bonds, etc:For purposes of thisTitle, amounts received by the holder upon the

retirement of bonds, debentures, notes orcertificates or other evidences of indebtednessissued by any corporation (including those issuedby a government or political subdivision thereof)

with interest coupons or in registered form, shallbe considered as amounts received in exchangetherefore.


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ASSETS

Short sales of Property: shall be consideredas gains or losses from sales or exchanges ofcapital assets.Short Sales- a transaction in which thespeculator sells securities which he does notown in anticipation of a decline in price, andwithin a reasonably short period of time buys

or covers the stock to complete thetransactiontreatment: always a short-term capitalgain or loss


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ASSETS

OPTION GAINS AND LOSSES: Option is a contract granting a person the

exclusive privilege to buy or not to buy certainobjects at any time with the agreed period at afixed price.

Option money

Gains or losses attributable to the failure to

exercise privileges or options to buy or sellproperty shall be considered as capital gainsor losses.


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ASSETS

SECURITIES BECOMING WORTHLESS: Lossfrom shares of stock, held as capital asset,

which have become worthless during thetaxable year shall be treated as capital loss atthe end of the year. Not deductible against the capital gains realized

from the sale, barter, exchange or other forms of

disposition of shares of stock during the taxableyear, but must be claimed against other capitalgains to the extent of capital gains.


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ASSETS

LIQUIDATING DIVIDEND: When acorporation distributes all of its assets incomplete liquidation, the gains or losssustained by the stockholder, whetherindividual or corporate is a capital gain orloss as the case maybe In case the distribution are in installments:1.

Gain on liquidation-first payments are appliedagainst the cost. Gain is returnable only when hehas completely recovered.

2. Loss on liquidation: can be taken only upon thedistribution of the final liquidating dividend


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ASSETS

LIQUIDATION OF PARTNERSHIP

Formula:Amount received for his interest Pxx

Less: Investment xx

Share in undistributed

partnership NI which has

been reported as income xx xx

Gain/loss Pxx


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SALES OF REAL PROPERTTY

CLASSIFIED AS CAPITAL ASSETS 6% based on the gross selling price, FMV or

zonal value prevailing at the time of salewhichever is the highest.

REQUISITES:1. There must be a sale, exchange or disposition ofproperty.2. the property must be real property.3. It must be a capital asset.

4. The seller (taxpayer) must be individual, estate ortrust.5. The real property must be located in thePhilippines.


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SALES OF REAL PROPERTTY

CLASSIFIED AS CAPITAL ASSETS

If the real property is sold in favor of hegovernment or any of its political

subdivisions or agencies or to thegovernment owned or controlledcorporations, taxpayer shall have theoptions: Pay the tax based on the latter rule, or

Include the gain in his gross incomesubject to the graduated rates of tax


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ILLUSTRATION: Nikko sold her vacant lot for

P2,000,000. The zonal value of the

property is P1,900,000 while theassessed value amount to P1,820,000.

How much is the final tax?


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Answer: Gross Selling Price (higher) P2,000,000

Rate of tax 6%

Final Tax P 120,000


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SALE OF PRINCIPAL RESIDENCE BY

INDIVIDUALS

RULE: The sale of principal residenceshall be exempt from tax if the

proceeds of sale shall be utilized inacquiring new residence within 18months from the date of sale.


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ILLUSTRATION: Fourth sold his residence in Manila on April 1, 2008.

The particular of which are as follows:

Gross selling price P8,000,000

FMV 10,000,000

Interest earned on escrow

agreement 15,000

Historical cost of residence 2,000,000

Compute the final tax on the sale.


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Answer:FMV (higher) P10,000,000

Rate of tax 6%

Capital gains tax (final tax) 600,000


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How much is the capital gains tax is tobe deposited under escrow agreement

assuming that the proceeds of the saleshall be utilized in acquiring a newresidence?


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The amount to be deposited in escrowshall be P600,000 capital gains tax

otherwise due on the presumed capitalgains.


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Compute the deficiency capital gainstax on December 31, 2009 assuming

that the seller did not utilize theproceeds in acquiring a new residence.


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Capital gain tax P600,000

Add: Interest

(600Kx20%x20/12) 200,000

Total P800,000

Less: Deposit in escrow 600k

Interest 15k 615,000Deficiency capital gains tax P195,000


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Compute the amount to be withdrawnfrom the escrow deposit on December

31, 2009 assuming that the sellerutilized only P4,000,000 for theconstruction of his new residence.


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Escrow deposit P600,000

Interest on bank deposit 15,000

Total P615,000Less: Charges

Capital gains tax P300k

Interest(300kx20%x20/12) 105k 405,000

Amount to be withdrawn P210,000


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SALE OF LANDS AND/OR BUILDINGS

BYCORPORATIONS

Subject to final tax of 6% of its grossselling price of FMV whichever is higher

(land and/or building not used in thebusiness)


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ILLUSTRATIONS: The BOD of Ivan Corporation decided to sell

its lands and buildings located in BatangasCity which are no longer being used in thebusiness operation.

The property with a fair market value ofP1,000,000 was sold for P1.2M.

Questions:

1. Is the sale subject to income tax?2. How about if the property is other than land

and/ or buildings?


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ANSWERS:1. Yes.

Selling Price (higher amt) P1.2M

Rate of tax 6%

Final Tax 72,000


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A sale of real property treated as capitalassets, other than lands and/or

buildings, is not subject to final tax. Theincome derived from the sale of suchproperty shall be reported as part of the

gross income and be subject to theusual income tax rates on corporations.


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Illustration:Fourth, head of the family, has the following

data in 2009:

Vacant Lot Apartment House PersonalCar

Selling price P2,000,000 P1,200,00 P175,000

FMV 1,900,000 1,450,000 250,000

Cost 5,000,000 1,000,000 200,000Agents comm. 200,000 120,000 -

Accum. Depn 200,000

Date acquired 11-18-99 1-21-01 12-26-98

Date sold 7-10-09 6-20-09 8-14-09


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INCOME FROM SALE OF REALPROPERTY NOT LOCATED IN THE

PHILS.

Gains realized from sale, exchange orother disposition of real property not

located in the Philippines, regardless ofclassification, by resident citizens shallbe subject to ordinary income tax.

If domestic corporations, the tax shalleither be the normal income tax or theMCIT, whichever is applicable.


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REAL PROPERTY SUBJECT OF

INVOLUNTARY TRANSFER

The involuntariness of sale shall haveno effect on the classification of such

real property in the hands of theinvoluntary seller, either as capital assetor ordinary asset, as the case maybe.


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PROPERTIES TRANSFERRED THRUINHERITANCE, DONATION OR DECLARATION

OF PROPERTYDIVIDENDS

The real property shall be capital asset iftransferred thru donation to the heir or

donee who is not engaged in real estatebusiness and who do not subsequently usesuch property in trade or business.

Property dividends shall be treated ascapital asset of stockholders who are notengaged in real estate business even if thecorporation which declared the dividend isengaged in real estate business.


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CAPITAL GAINS TAX ON

STOCK TRANSACTIONS RULE: If the stock is listed and traded, it

subject to percentage tax (1/2 of 1% of grossselling price). If the not listed and traded, it is

subject to income tax.Not over 100,000 5%Any amount in excess of 100,000 10%

The return shall be filed within 30 days after

each transaction and the final consolidatedreturn of all transactions during the taxableyear shall be filed on or before the 15th day ofthe fourth month following the close of thetaxable year.


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ILLUSTRATION Fourth sold her shares of stock which

are not traded in the stock exchange

for P650,000. The shares are recordedin its boos at a cost of P525,000.

Compute the following:

1. Final tax on the sale2. The tax on the sale if the shares are

listed and traded in the stock exchange


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SOLUTION:1. Shares are not listed and traded

Selling Price P650,000

Cost 525,000Net Capital gain 125,000

Tax on P100,000 x 5% P5,000

25,000 x 10% 2,500Capital gains tax P7,500


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Note:

If the shares of stocks are listed and

traded in the stock exchange, the saleis not subject to income tax.

However, it shall be subject to other

percentage tax (stock transaction tax)at a rate of of 1% of the grossselling price.


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ILLUSTRATION: Ivan sold the following shares of stock:

Listed

andtraded

Not

traded

Not

traded

Not

traded

Not

traded

SP 500,000 350,000 20,000 125,000 160,000

Cost 450,000 220,000 65,000 90,000 130,000

Capitalloss ,07

20,000 100,000 15,000 - -

Date sold 8-20-2008 7-12-2008

08-15-2009

11-5-2008

1-20-1009


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Compute the capital gains tax for eachtransaction and the final consolidates

return at the end of 2008.


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SOLUTION: Listed and traded

The sale of shares of stocks which arelisted and traded in the stock exchangeis not subject to income tax. They are,however, subject to percentage tax on

business.


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Nottraded

Date sold Selling

Price

Cost Gain(loss) Tax

7-12-2008 350,000 220,000 130,000 8,000

8-15-2008 20,000 65,000 (45,000) -

11-5-2008 125,000 90,000 35,000 1,750495,000 375,000 120,000 9,750


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Capital gains tax paid P9,750

Capital gains tax payable

P100k x 5% P5,000

20k x 10% 2,000 7,000

Amount refundable P2,750

The capital gains tax payable on the sale of shares ofstocks in 2009 is excluded from the consolidatedreturn because the sale was made in the followingyear.


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LOSSES FROM WASH SALES OF

STOCKS OR SECURITIES WASHSALE- is a sale of securities

where substantially identical securities

are acquired or purchased within a 61day period beginning 30 days beforethe sale and ending 30 days after thesale. Substantially identical-means that the

stock must be the same class, or in thecase of bonds, the terms thereof must bethe same.


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LOSSES FROM WASH SALES OF

STOCKS OR SECURITIES

Losses on wash sales are not deductibleas losses from sales or exchanges of

property.


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ILLUSTRATI

ON:

Ivan had the following transactions on the substantiallyidentical common stock of Basil Corporation:

Date Transaction Cost pershare

Amount

09-20-2008 Purchased 100 shares P50 P5,000

12-11-2008 Purchased 50 shares P55 2,750

12-26-2008 Purchased 25 shares P45 1,125

1-2-2009 Sold the sharespurchased on Sept 20

P40 4,000


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Required:

Compute the gain or loss on the sale in2009 and indicate whetherdeductible/taxable or not.


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Solution:December 26, 2008 25

December 11, 2008 50

Shares purchased w/in the 61 day period 75Cost per share for shares bought Sept 20 50

Amount 3,750

Less: Proceeds from sale of 75 shares 3,000

Non-deductible loss 750


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The loss on the sale of P250 is deductible bec. Thatamount which corresponds to the 25 shares are nolonger covered by the 61-day period

Cost of shares bought on Sept 20 5,000

Proceeds from the sale 4,000

Loss on sale 1,000

Less:non-deductible loss 750Deductible loss on sale of shares of stock 250

DEALINGS IN PROPERTY

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