Chapter 8: Ordinary Assets and Capital Assets and Tax Free Exchanges
Importance of knowing the nature of asset
It is important to determine the nature of the asset sold in order to deduct and withhold the
correct withholding taxes, if any on the
t he transaction. For example, real property classified as ordinary
asset is subject to the
t he 0% to 6% expanded w
withholding
ithholding tax, depending on the selling price, to be
deducted by the buyer-withholding agent from the gross selling price, while real property classified as
capital asset is liable to the 6% final capital gains tax which is not required to be withheld by the buyerwithholding agent.
Sale or Exchange
The sales or exchange of property must be consummated and not just perfected.
Dacion en pago – (donation) is the transmission of the ownership of a thing by the debtor to the
creditor at an accepted equivalent of the performance.
Capital Asset – means property held by the taxpayer (not connected with his trade or business); not part
of his inventory for trading in business.
Examples are ordinary assets:
1. Stock in trade of the taxpayer or other property of a kind which would properly be included
in the inventory of the taxpayer.
2. Property held by the taxpayer primarily for sale to customers
3. Property used in trade or business which is subject to the allowance for depreciation
depre ciation
4. Real property used in trade or business of the taxpayer.
Material distinctions between sale of capital asset and ordinary asset:
1. Seller of real property
2. Nature of the asset sold
3. Type of capital asset sold
Guidelines in determining whether real property is capital
c apital asset or ordinary asset
a.
Taxpayer is engaged in real estate business
Real estate dealer – all real property acquired by the real estate dealer shall be
considered as ordinary assets.
Real estate developer – all real properties acquired by the real estate developer,
whether develop or undevelop 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 be included in the inventory of
the taxpayer if on hand is considered as ordinary assets.
Real estate lessor – all the properties of the real estate lessor whether land/or
improvements are considered as ordinary assets.
b. Taxpayer not engaged in the real estate
e state business
All real properties whether land building or other improvements which are used or
being used or have been previously used in trade
tr ade or business of the taxpayer shall be
considered as ordinary assets.
c.
Taxpayer changing business from real estate business to non real estate
e state business.
In the case of a taxpayer who change business or amendment of the primary purpose of
the business shall not result in the re-classification
re-c lassification of real property held from ordinary
asset to capital asset.
d. Treatment of abandoned and ideal real property
Real properties forming part of the stock in trade of taxpayer engaged in real estate
business which later on abandoned and became idle shall not result in its conversion
into a capital asset. Otherwise, it will be automatically converted to
t o capital assets upon
showing proof that the same have not been
bee n used in business for more than two years
prior to the consummation of the taxable transactions involving said properties.
e. Treatment of real prop that have been transferred to a buyer/transferee whether the transfer is
thru sale, barter or exchange,
exc hange, inheritance, donation or declaration of property dividends.
The classification of such property in the hands of the buyer/transferee
buyer/ transferee shall be
determined in accordance with the ff rules:
o
Real prop tranfered thru succession (inherited) or donation to the heir or done who is
not engaged in the real estate
e state business with respect to the real prop inherited or
donated shall be considered as a capital asset in the hands of the heir or done
(recipient).
o
real prop received as dividend by the stockholder
stoc kholder who are not engaged in real estate
business shall be treated as capital asset in the hands of the recipients.
re cipients.
o
Real property received in an exchange
ex change shall be treated as ordinary asset in the hands of
the recipient who is engaged in real
r eal estate business, will use in business the property
received in the exchange.
f.
Treatment of real prop subject to involuntary transfer
In case of involuntary transfer including expropriation or foreclosure sale, such sale shall
have no effect to the classification of such real prop in the hands of the sellter, either as
capital asset or ordinary asset.
NOTE : The rate of six percent (6%) shall be imposed on capital gains presumed
p resumed to have been realized
by the seller from the sale, exchange or other disposition or real properties located in the Philippines
classifiedas capital assets based on the gross selling price or fair market value as determined by the
commissioner of internal revenue.
FORECLOSURE SALES OF REAL PROPERTY
In case the mortgagor exercise
e xercise his right of redemption within one year form the issuance of the
certificate of sale, no capital
c apital gains tax shall be imposed because no capital gains has been derived by the
mortgagor and no sale or transfer of real property was realized.
REDEMPTION PERIOD
The mortgagor-owner is given one (1) year from the date of sale within which to redeem
r edeem the
property sold at public auction sale from the winning bidder. The period of redemption allowed
acquired by a bank thru extrajudicial foreclosure sale was shortened to ninety (90) days pursuant to the
General Banking Law of 2000.
TAX FREE EXCHANGES
The entire amount of the gain or
o r loss shall be recognized and exempt from ttaxes
axes on the ff:
1. No gain or loss shall be recognized if in pursuant of a plan of merger or consolidation.
corporation
poration by a person in exchange for
2. No gain or shall be recognize if pro is transferred to a cor
stock or unit of participation in such a corporation of which as a result of such exchange said
person alone or together with others, not exceeding four (4) persons, gains control of said
corporation, provided that stocks issued for services shall not be considered as issued in return
for property.