ORDINARY Asset

v
Capital Asset
Erwin Selodio
NATURE OF ASSET
 ORDINARY ASSET (Sec 39A)
 CAPITAL ASSET (Sec 38A)
 Inventory on hand at end of taxable year
 Stock in trade held primarily for sale or for lease in
the course of trade or business
 Asset used in trade or business, subject to
depreciation
 Real property used in trade or business
 All other assets, whether or not used in trade or
business, other than the above assets
TAX BASES AND RATES
 CAPITAL ASSETS
 A. REAL PROPERTY IN THE
PHILIPPINES
 B. SHARES OF STOCKS OF DOMESTIC
CORPORATION
 C. OTHER CAPITAL ASSETS
 Consideration or FMV, whichever is higher
times 6% = CGT.
 Sale of principal residence is exempt from
CGT, provided conditions are satisfied
Listed and traded in local stock exchange:

GSP times ½ of 1% = Stock transaction tax
 Listed but traded over the counter or
unlisted shares: Gross selling price less cost
or adjusted basis = Capital gain or loss times
5%/10% = CGT
 Include in global tax system, but long-term
capital gain or loss shall be taxable or
deductible only at 50% thereof.
ORDINARY v. CAPITAL ASSETS

 Who is seller of asset?

 Person is habitually engaged in real estate business
 Presumption or proof when habitually engaged in real estate business
 6-transaction rule

 Person is not habitually engaged in real estate business

 Nature of asset sold?

 If it forms part of stock primarily for sale or it is being used in trade or business,
ordinary asset
 Otherwise, capital asset
Stock classified as Capital Asset

 (Sec 2(a) of RR 6-2008)

 refers to stocks and securities held by taxpayers other than dealers in
securities
Dealer in Securities
 Sec 2(b) of RR 6-2008)
 refers to a merchant of stocks or securities, whether an individual, partnership or corporation,
with an established place of business, regularly engaged in the purchase of securities and the
resale thereof to customers; that is one, who as merchant buys securities and re-sells them to
customers with a view to the gains and profits that may be derived therefrom.
 means any person who buys and sells securities for his/her own account in the ordinary course of
business (Sec. 3.4, SRC).
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
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.
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.
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.
 How to determine ordinary asset v capital
asset?
1. Real properties shall be classified with respect to taxpayers engaged in the
real estate business
2. 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.
 How to determine ordinary asset v capital
asset?
3. 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

4. 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
How to determine ordinary asset v
capital asset?
5. 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.

6. 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
How to determine ordinary asset v
capital asset?
7. 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
What is 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%
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.
What is the procedure in the filing of
Final Capital Gains Tax return
 File the 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 property is
located. In places where there are no AAB, the return will be
filed directly with the Revenue Collection Officer or Authorized
City or Municipal Treasurer.

 One-Time Transaction (ONETT) taxpayers shall mandatorily use

the eBIRForms in filing all of their tax returns. They may opt to
submit their tax returns manually using the eBIRForms Offline
Package in the RDO where the property is located or
electronically through the use of the Online eBIRForms System.
(Sec. 3(2) RR No. 6-2014)
Tax Forms

 BIR Form 1706 – Final Capital Gains Tax Return (For Onerous Transfer of Real
Property Classified as Capital Assets -Taxable and Exempt)
 BIR Form 1707 - Capital Gains Tax Return (For Onerous Transfer of Shares of
Stocks Not Traded Through the Local Stock Exchange)
 BIR Form 1707A - Annual Capital Gains Tax Return (For Onerous Transfer of
Shares of Stocks Not Traded Through the Local Stock Exchange)
Who/what are considered exempt from
the payment of Final Capital Gains Tax
 Dealer in securities, regularly engaged in the buying and selling of securities
 An entity exempt from the payment of income tax under existing investment
incentives and other special laws
 An individual or non-individual exchanging real property solely for shares of stocks
resulting in corporate control
 A government entity or government-owned or controlled corporation selling real
property
 If the disposition of the real property is gratuitous in nature
 Where the disposition is pursuant to the CARP law
THANK YOU
Real properties shall be classified with
respect to taxpayers engaged in the real
estate business
 All real properties acquired by the real estate dealer shall be considered as
ordinary assets

 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.
Real properties shall be classified with
respect to taxpayers engaged in the real
estate business
 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
Real properties shall be classified with
respect to taxpayers engaged in the real
estate business
 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
ORDINARY v. CAPITAL ASSETS

 Type of capital asset sold?

 If CA is used as principal residence of seller who is a citizen or alien
who resident or non-resident but engaged in trade in the Phil, sale is
exempt from 6% CGT, provided other conditions are present.
 Otherwise, sale is taxable.
 Tax base, tax rate, and gain or loss from sale
 CA located in the Phil – 6% CGT; CA located abroad – Global tax
system. Basis is FMV or GSP, whichever is higher. Seller pays the 6%
CGT, but buyer does not withhold the FWT.
 In OA, tax base is net income and rate of tax depends on whether
seller is individual or corporation; it is subject to EWT provisions.
ORDINARY v. CAPITAL ASSETS

 Cost or adjusted basis upon subsequent sale

 This is not material, if asset sold is capital asset, because tax base is GSP/FMV,
whichever is higher.
 This is important, if asset sold is ordinary asset, because tax base is net income.

 Donor’s tax on sale for insufficient consideration

 If CA, no donor’s tax due.
 If OA, there is donor’s tax due per Sec 100, NIRC.

 Filing of tax return

 If CA, within 30 days from date of sale
 If OA, within 45/60 days from close of quarter