1) What is meant by capital asset?
Capital asset means property held by the taxpayer (whether or not connected with his trade or business), but does not include –
a) stock in trade of the taxpayer or other property of
a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year; or
b) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or
c) property used in the trade or business of a
character which is subject to the allowance for depreciation provided
in subsection (F) of Sec. 34 of the Code; or
d) real property used in trade or business of the taxpayer.
2) What is meant by ordinary asset?
Ordinary asset refers to all properties specifically
excluded from the definition of capital assets under Sec. 39 (A)(1) of
the NIRC.
3) What is meant by real property?
Real property shall have the same meaning attributed
to that term under Article 415 of Republic Act No. 386, otherwise known
as the “Civil Code of the Philippines.
4) What does a real estate dealer refer to?
A real estate dealer refers to any person engaged in
the business of buying and selling or exchanging real properties on his
own account as a principal and holding himself out as a full or
part-time dealer in real estate.
5) What does a real estate developer refer to?
Real estate developer refers to any person engaged in
the business of developing real properties into subdivisions, or
building houses on subdivided lots, or constructing residential or
commercial units, townhouses and other similar units for his own
account and offering them for sale or lease.
6) What does a real estate lessor refer to?
Real estate lessor refers to any person engaged in the
business of leasing or renting real properties on his own account as a
principal and holding himself out as a lessor of real properties being
rented out or offered for rent.
7) Who are considered engaged in the real estate business?
Taxpayers who are considered engaged in the real
estate business refer collectively to real estate dealers, real estate
developers and/or real estate lessors. A taxpayer whose primary purpose
of engaging in business, or whose Articles of Incorporation states that
its primary purpose is to engage in the real estate business shall be
deemed to be engaged in the real estate business.
8) Who are considered not engaged in the real estate business?
Taxpayers who are considered not engaged in the real
estate business refer to persons other than real estate dealers, real
estate developers and/or real estate lessors.
9) Who are considered habitually engaged in the real estate business?
Real estate dealers or real estate developers who are
registered with the Housing and Land Use Regulatory Board (HULRB) or
HUDCC
10)How can you determine whether a particular real property is a capital asset or an ordinary asset?
a) Real properties shall be classified with respect to taxpayers engaged in the real estate business as follows:
i) All real properties acquired by the real estate dealer shall be considered as ordinary assets.
ii) All real properties acquired by the real estate
developer, whether developed or undeveloped as of the time of
acquisition, and all real properties which are held by the real estate
developer primarily for sale or for lease to customers in the ordinary
course of his trade or business or which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable
year and all real properties used in the trade or business, whether in
the form of land, building, or other improvements, shall be considered
as ordinary assets.
iii) All real properties of the real estate lessor,
whether land, building and/or improvements, which are for lease/rent or
being offered for lease/rent, or otherwise for use or being used in the
trade or business shall likewise be considered as ordinary assets.
iv) All real properties acquired in the course of
trade or business by a taxpayer habitually engaged in the sale of real
property shall be considered as ordinary assets.
Note: Registration with the HLURB or HUDCC as a real
estate dealer or developer shall be sufficient for a taxpayer to be
considered as habitually engaged in the sale of real estate.
If the taxpayer is not registered with the HLURB or
HUDCC as a real estate dealer or developer, he/it may nevertheless be
deemed to be engaged in the real estate business through the
establishment of substantial relevant evidence (such as consummation
during the preceding year of at least six (6) taxable real estate sale
transactions, regardless of amount; registration as habitually engaged
in real estate business with the Local Government Unit or the Bureau of
Internal Revenue, etc.)
b) In the case of taxpayer not engaged in the real
estate business, real properties, whether land, building, or other
improvements, which are used or being used or have been previously used
in trade or business of the taxpayer shall be considered as ordinary
assets.
c) In the case of taxpayers who changed its real
estate business to a non-real estate business, real properties held by
these taxpayer shall remain to be treated as ordinary assets.
d) In the case of taxpayers who originally registered
to be engaged in the real estate business but failed to subsequently
operate, all real properties acquired by them shall continue to be
treated as ordinary assets.
e) Real properties formerly forming part of the stock
in trade of a taxpayer engaged in the real estate business, or formerly
being used in the trade or business of a taxpayer engaged or not
engaged in the real estate business, which were later on abandoned and
became idle, shall continue to be treated as ordinary assets. Provided
however, that properties classified as ordinary assets for being used
in business by a taxpayer engaged in business other than real estate
business are automatically converted into capital assets upon showing
proof that the same have not been used in business for more than two
years prior to the consummation of the taxable transactions involving
said properties
f) Real properties classified as capital or ordinary
asset in the hands of the seller/transferor may change their character
in the hands of the buyer/transferee. The classification of such
property in the hands of the buyer/transferee shall be determined in
accordance with the following rules:
i) Real property transferred through succession or
donation to the heir or donee who is not engaged in the real estate
business with respect to the real property inherited or donated, and
who does not subsequently use such property in trade or business, shall
be considered as a capital asset in the hands of the heir or donee.
ii) Real property received as dividend by the
stockholders who are not engaged in the real estate business and who do
not subsequently use such property in trade or business, shall be
considered as a capital asset in the hands of the recipients even if
the corporation which declared the real property dividends is engaged
in real estate business.
iii) The real property received in an exchange shall
be treated as ordinary asset in the hands of the case of a tax-free
exchange by taxpayer not engaged in real estate business to a taxpayer
who is engaged in real estate business, or to a taxpayer who, even if
not engaged in real estate business, will use in business the property
received in exchange.
g) In the case of involuntary transfers of real
properties, including expropriations or foreclosure sale, the
involuntariness of such sale shall have no effect on the classification
of such real property in the hands of the involuntary seller, either as
capital asset or ordinary asset as the case may be.
11) What is the basis in the valuation of property?
The value of the real property will be based on the
selling price, fair market value as determined by the Commissioner
(zonal value) or the fair market value as shown in the schedule of
values of the Provincial or City Assessor, whichever is higher.
If there is no zonal value, the taxable base is
whichever is higher of the gross selling price per sales documents or
the fair market value that appears in the latest tax declaration.
If there is an improvement, the FMV per latest tax
declaration at the time of the sale or disposition, duly certified by
the City/Municipal Assessor shall be used. No adjustments shall be
added on the said value, provided that the tax declaration bears the
upgraded fair market value of the said property pursuant to Section 219
of R.A. No. 7160, otherwise known as the Local Government Code of 1991
and the last paragraph of the Local Assessment Regulations No. 1-92
dated October 6, 1992.
In case the tax declaration being presented was issued
three (3) or more years prior to the date of sale or disposition of the
real property, the seller/transferor shall be required to submit a
certification from the City/Municipal Assessor whether or not the same
is still the latest tax declaration covering the said real property.
Otherwise, the taxpayer shall secure its latest tax declaration and
shall submit a copy thereof duly certified by the said Assessor. (RAMO
1-2001)
For shares of stocks, it will be based on the net
capital gains realized from the sale, barter, exchange or other
disposition of shares of stocks in a domestic corporation, considered
as capital assets not traded through the local stock exchange.
12) What are the applicable tax rates of Capital Gains Tax under the National Internal Revenue Code of 1997?
a) Real Properties - 6 %
b) For Shares of Stocks not Traded in the Stock Exchange, on the net Capital Gains
- Not over P100,000 - 5%
- Any amount in excess of P100,000 - 10%
13) Who are required to file the Final Capital Gains Tax return?
Every person, whether natural or juridical, resident
or non-resident, including estates and trusts, who sells, transfers,
exchanges or disposes real properties located in the Philippines
classified as capital assets, including pacto de retro sales and other
forms of conditional sales or shares of stocks in domestic corporations
not traded through the local stock exchange classified as capital
assets.
14) What is the procedure in the filing of Final Capital Gains Tax return?
File the Final Capital Gains Tax return in triplicate
(two copies for the BIR and one copy for the taxpayer) with the
Authorized Agent Bank (AAB) in the Revenue District where the seller or
transferor is registered, for shares of stocks or where the property is
located, for real property. In places where there are no AAB, the
return will be filed directly with the Revenue Collection Officer or
Authorized City or Municipal Treasurer.
15) Who/what are considered exempt from the payment of Final Capital Gains Tax?
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Dealer in securities, regularly engaged in the buying and selling of securities
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An entity exempt from the payment of income tax under existing investment incentives and other special laws
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An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control
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A government entity or government-owned or controlled corporation selling real property
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If the disposition of the real property is gratuitous in nature
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Where the disposition is pursuant to the CARP law
16) Who are conditionally exempt from the payment of Final Capital Gains Tax?
Natural persons who dispose their principal residence, provided that the following criteria are met:
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The proceeds of the sale of the principal residence
have been fully utilized in acquiring or constructing new principal
residence within eighteen (18) calendar months from the date of sale or
disposition;
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The historical cost or adjusted basis of the real
property sold or disposed will be carried over to the new principal
residence built or acquired;
-
The Commissioner has been duly notified, through a
prescribed return, within thirty (30) days from the date of sale or
disposition of the person’s intention to avail of the tax exemption;
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Exemption was availed only once every ten (10) years; and
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There is no full utilization of the proceeds of sale
or disposition. The portion of the gain presumed to have been realized
from the sale or disposition will be subject to Capital Gains Tax.
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In case of sale/transfer of principal residence, the
Buyer/Transferee shall withhold from the seller and shall deduct from
the agreed selling price/consideration the 6% capital gains tax which
shall be deposited in cash or manager’s check in interest-bearing
account with an Authorized Agent Bank (AAB) under an Escrow Agreement
between the concerned Revenue District Officer, the Seller and the
Transferee, and the AAB to the effect that the amount so deposited,
including its interest yield, shall only be released to such Transferor
upon certification by the said RDO that the proceeds of the
sale/disposition thereof has, in fact, been utilized in the acquisition
or construction of the Seller/Transferor’s new principal residence
within eighteen (18) calendar months from date of the said sale or
disposition. The date of sale or disposition of a property refers to
the date of notarization of the document evidencing the transfer of
said property. In general, the term “Escrow” means a scroll, writing or
deed, delivered by the grantor, promisor or obligor into the hands of a
third person, to be held by the latter until the happening of a
contingency or performance of a condition, and then by him delivered to
the grantee, promise or obligee.
17) What is a Certificate Authorizing Registration?
Certificate Authorizing Registration (CAR) is a
certification issued by the Commissioner or his duly authorized
representative attesting that the transfer and conveyance of land,
buildings/improvements or shares of stock arising from sale, barter or
exchange have been reported and the taxes due inclusive of the
documentary stamp tax, have been fully paid.
CARs shall now have a validity of one (1) year from
date of issue. In case of failure to present the same to the Registry
of Deeds (RD) within the one (1) year period, the same shall be
presented for revalidation to the District Office where the CAR was
issued. The revalidation, evidenced by stamping the phrase "revalidated
on __________ to expire on ___________" in a conspicuous space in the
CAR, shall be good for another one-year period, after which the CAR
losses its validity. (RMO 15-2003)
