hi guys welcome back to video channel again this is just real ahras and today in this video we will discuss about dealings in properties particularly the ordinary and capital assets so in our previous videos we have discussed already the four general classification of gross income we have the compensation income the business and professional income the passive income in capital gains we have already discussed the compensation income the business and professional income and of course the passive income but we have not yet discussed the capital gains so in this video we will discuss about dealings and properties [Music] there are a lot of things that you should consider before computing capital gains so i divided this topic into several videos and in this video we will focus our discussion on the ordinary assets versus capital assets and of course the tax treatment for the ordinary gains okay so if you're ready let's start at the end of this lesson you will be able to number one classify the ordinary and capital assets determine the tax treatment and the rules for their gains apply withholding taxes on sale disposition exchange or barter of ordinary assets and finally compute with holding taxes for such sale disposition exchange or barter so the national internal revenue code explicitly defines ordinary assets as first inventories stocks in trade held by the dealers other property or in kind included in inventory of the taxpayer so anything that is included in the inventory or are held for sale under the normal operations whether raw materials or working process or any or finished goods inventories or stocks if you're a broker or dealer of stocks or if you are a dealer of personal properties like cars vehicles anything that is included in the inventory is considered as an ordinary asset okay second personal properties used in business and subjected to depreciation are also considered as ordinary assets so office computers we have the cars the vehicles the machines any equipment used in business and subjected to depreciation are considered also as ordinary assets third we have real property held for sale to customers in the ordinary course of business so when we say real property held for sale this real properties are inventory for example if you are a realtor a developer you are selling housing units or residential units those real properties the land the houses are considered as your inventory therefore these real properties are also considered as ordinary assets and finally we have real properties used in business other than those held as investment property so any real property that is used in business like office building the warehouse the swimming pool if you are an entertainment recreational business anything any real property which are used in business which is used in business are also considered as ordinary assets so those are the four definition of ordinary assets under the national internal revenue code again if it is inventory ordinary asset if it is a real property held as inventory or are held for sale ordinary asset personal properties used in business and subject to depreciation ordinary asset real properties that are used in business again ordinary assets but if those real property are held as investment property like for the correction of wealth these investment properties are not used in business but are held for investment purposes these are not considered as ordinary assets remember if held as inventories or for sale under normal business and if used in business these are treated as ordinary assets okay that is the basic rule otherwise when the property it does not belong to those four they are considered as capital assets so let us define what is a capital asset so capital asset is defined by exclusion meaning those which are not considered as ordinary assets are classified as capital assets example okay so those other than owner assets all properties not used in business residential lot your own personal home and then family car receivables arising from the sale of inventory the sa the inventory might be an ordinary asset but the receivables themselves are not considered as ordinary assets their capital assets because we don't normally sell receivables right also investment properties for lease for example if you have an a spare real property and you don't know what to do with that so you just maintain that for investment purposes that's an investment property and that is a capital asset so let's have this example you will try to classify which is an ordinary asset and which is a capital asset goods for sale what do you think is this a capital asset or an ordinary asset very good that is an ordinary asset how about this one raw materials is this using business are this for sale yes that is an ordinary asset how about this one office computers are these for sale are these using business yes it's an ordinary asset how about this one personal vehicle of course it's a capital asset these are neither used in business nor held for sale under normal operation how about this one residential dwelling your own family home that is capital asset and this warehouse as i have mentioned earlier of course this is an ordinary asset why it's real property it is used in business how about this one investment property okay that is a capital asset and finally we have whole appliances all right this is a capital asset so it would not matter if it's real or personal but the use all right so if it's for the use of business it's for the business if it's for sale then that is an ordinary asset otherwise capital asset so why do we need to classify whether ordinary asset or capital asset ordinary gains or losses from sale of order assets are treated and taxed differently from capital gains or capital losses arising from the sale of capital assets so the tax for ordinary assets is different from the tax to capital assets okay so in our other video which i will link here above we will discuss about capital gains in this video we will discuss about ordinary gains and losses order gains are subject to normal tax meaning the graduated rates if you are an individual taxpayer or corporate tax if you are a corporate taxpayer ordinary gains and ordinary losses are always added to your gross income or reducted your gross income capital gains may be subjected to capital gains tax so the difference is that when we say ordinary gains or ordinary losses these are the gains or losses arising from the sale of order assets and the gains the ordinary gains are added to your gross income while the ordinary losses are deducted from the gross income so in our previous discussion we have already shown how to compute gross income for business okay so this ordinary gains and losses are also considered in such computation if it's again added if it's a loss deducted provided that these are ordinary gains and ordinary losses however if it is a capital gain or capital losses that could be subject to a different tax rule or tax treatment which we'll discuss in our other video so tax treatment for owner assets order gains and losses derived from the sale or exchange of order assets are always included or added in determining the ordinary in gross income subject to tax always whether you are an individual taxpayer whether your corporate taxpayer any order gains or losses are always added to your gross income for example you have a company and you have old computers and you want to replace this old computers with new ones so to do so you sell these all computers at a salvage value and you have a game so since this old computers are were used in business and are now for sale any gains or losses arising from that sale are added or deducted to your gross income because those assets are order assets okay they are treated as normal gains added to gross income if it is an ordinary gain or losses deducted from the gross income if it is an order loss if it is an order gain or losses it's always considered added to your girl's income order gains and loss will never be subject to capital gains tax so again in this video we will focus our discussion on the ordinary gains and ordinary losses okay and their tax treatment while in our other video we will discuss more on the capital assets the capital gains and the capital losses so we will link that video here above so let us now discuss the tax treatment for ordinary assets so number one if it is personal property and classified as inventory for example if you are a dealer of cars or vehicles those are personal properties and those are classified as inventories or if you are a seller or merchandiser of laptops those are also considered as a property as personal property and also as inventory also we have personal property but non-inventory but use in business for example if you have in your office an office table that is a personal property not for sale but are used in business again ordinary asset or if you have in your office a printer that is an ordinary asset it may not be an inventory but it is a personal property used in business so our tax treatment for these two items whether inventory or non-inventory but use in business and their personal properties will be the same they are added to the gross income if it is an ordinary gain or deducted from the gross income if it is an ordinary loss so i hope you get that so if it is an inventory a personal property which is an inventory ordinary gains are added to the gross income ordinary laws are deducted from the gross income if it is a personal property but not inventory but use in business then the same would be the tax treatment let us illustrate who one is a sole proprietor of jj auto parts during the year 2020 juan sold auto parts costing him 1 million pesos for a price of 1.7 million pesos he also sold used computer equipment for a salvage price of 30 000 pesos the book value of such computer is 40 000 pesos so there are there were two items sold during the year 2020 number one the auto parts in number two the computer equipment so the auto parts are inventories of one because he is engaged in selling other parts okay so therefore these auto parts which costed him 1 million pesos and were sold for 1.7 are considered as personal property inventory also he sold office computers a computer equipment for 30 000 pesos and that's in the book value of such old computer was actually 40 000 pesos so again this computer equipment is a personal property it might not be an inventory but it is used in business therefore again ordinary asset our solution would be we have ordinary gains from sale of inventory that is the selling price 1.7 and the cost of 1 million we have an ordinary gain of 700 000 we also have an ordinary loss from the sale of used computer remember that the price is 30 000 only and the cost or the book value rather is 40 000 therefore there's a loss of 10 000. so there is a net ordinary gains of 690 000 pesos so this six twenty thousand pesos is added to the gross income of one it is gross income subject to the normal tax next we have real property again this real property is classified as inventory for example if you are a seller of or a realtor or a developer canela homes for example or fill invest this are real properties the land the housing units are real properties and classified as inventory what could be the tax treatment this are subject to withholding taxes with the following rules so we know already what withholding taxes are remember in our previous video we have discussed that when we say critical withholding taxes this means that when the seller if i am the seller of this real property my buyer will withhold a certain amount so if i will sell this for 1 million my buyer would pay me less because he would withhold something from that amount okay that's creditable withholding taxes so these rules will apply first it will be exempted from the cwt or the credible during taxes if sold by real estate business registered under the house and land use regulatory border hl urb in the selling price per house and or lot does not exceed 180 000 pesos in metro manila and other urban areas or 150 000 pesos in other areas so if the seller is a real estate business registered under hlu rb or the house and land use regulatory board and the price do not is per unit do not exceed 180 000 pesos if you are in manila or one dozen pests in other areas then that sale is exempted from the creditable holy taxes another is it will also be exempted from cwt if the real estate business is registered under the board of investments or boi and exempted under ra 7916 so what is ra7916 is a special economic zone act okay so if the real estate business seller is registered under the board of investment or the pesa then that could also be exempted from the cwt or if it is sold by the gsis or the sss or the field health or the pcso if they are the seller then that could also be exempted from the withholding house so again if what is being sold is a real property which are considered as inventory they are subject to creditable withholding taxes as a general rule but if the seller is registered under hlu rb and the price is not more than 180 or 150 or the seller is registered under boi or peza or the seller is the gsis itself or ss phil health or pcso those are exempted from cwt they can be subject to cwt if the seller is not any of those three not registered with hlu rb or registered but the price is more than 180 or 150. or it is not registered under boi or peza or it is not gsis or ss then that could be subject to cwt if the price does not exceed 500 000 pesos the cwt will be 1.5 percent if the price exceeds 500 000 pesos but does not exceed 2 million then the cwt is 3 if it is more than 2 million then the cwt is 5 so again to help you memorize this if it is a personal property classified as inventory or if it is a personal property used in business they are treated as ordinary assets and any gains or losses are added or reducted from the gross income if it is a real property and classified as an inventory then it could be subject to cwt but it could be exempted from cwt as a rule if the seller is registered under under hlu rb and the price is not more than 150 or 180 or the seller suggested under boi or peza or if the seller is the gsis ss phil health or pcso otherwise subject to 1.5 or 3 percent or 5 let's have an illustration abc company is a realtor therefore his business or its business is a real estate it is registered with hlurb the house and land use regulatory board during the year 2020 it sold the following real properties okay so to buy your a we have the selling price of 140 000 to buy your b we have 350 000 to buy your c 1 million and to buy your d 2.1 million other properties personal or real it's real properties are the real properties inventories or not they are inventories abc is a realtor right so therefore this sales shall be subject to withholding tax however take note that abc is registered with hlu rb therefore there could be some sales here which could be exempted from the withholding tax so let's identify what could be our tax treatment so for abc's sale to a the price is 140 and we know that the sale of real property classified as inventory could be exempted from cwt if the seller is registered with hlu rb and the price is not more than 180 000 therefore this a qualifies for exemption so this is exempted from cwt so next we have the sale to be oh this exceeds the the 180 000 pesos limit so what do you think this is subject to cwt and the tax would be 1.5 because it does not exceed 500 000 pesos remember if the price is not more than 500 000 pesos the tax should be 1.5 and if the price would be 500 to 2 million then the tax would be 3.0 percent and if it's more than two million it's five percent in the ability this means that upon payment when b pays abc company b will withhold 1.5 percent so instead of begging 350 b would pay 344 thousand 750 why because b is a withholding agent okay b will withhold 1.5 percent so 350 000 pesos times 1.5 percent that is 5250 so 350 minus 5250 that's 344 750 that is now the payment of b to abc company so another is if the property sold is a real property but non-inventory not for sale but are used in business for example if you have an office building and you want to sell the office building that is a real property used in business but are non-inventories again that is an ordinary asset so this is subject to six percent creditable withholding tax regardless of the price so whatever the price is it will be subject to six percent creditable withholding tax so if you sell an office building or a warehouse and you don't want to use your warehouse anymore and you want to sell that any price or any amount in exchange for that warehouse will be subject to six percent critical withholding tax so gains and losses arising from the sale of ordinary assets whether real or personal properties are still added in the competition of gross income the tax withheld for the sale of real properties are only creditable take note if it's an ordinary asset every withholding tax here is accredited withholding tax not final tax so let's have a comprehensive illustration xyz company is a realtor registered with hlurb again during the year 2020 it sold the following real properties so we have about the buyers we have the properties the cost and the selling price so buyer a to buyer a we have a a real property an inventory so sold for 160 000 pesos and the cost of that property was 120 another property sold was an inventory to be and then the price was 400 000 pesos and the cost was 150 000 pesos another property to see the price is 8.90 and the cost is 400 and of course today we have the price of total 400 and in the cost of 1600 xyz company also sold its old office it's again a real property and then the price was 1.750 and then the cost was 1.1 million and then f we have here to f used car an old car for a price of 5 000 pesos in the cost of 320. so let's classify which among here is a personal or real property so we know the sale to a b c and d are all real properties and are considered as inventory and here to e this is a real property but used in business not inventory we also have personal property here to f used car and that is again a an ordinary asset because it is used in business so okay so these are the real properties and this are the personal properties but all of that all of those things are classified as ordinary assets because they are inventories they are either inventories or properties used in business okay so again this are all ordinary assets so the xyz company also revealed that during the year 2020 it had a total deductible expense of two hundred so we will compute the income tax due and be a bull of xyz company so before that we will first um identify which is subject to cwt which is which is not or which are not so we know that the sale to a is exempted from c w t why because x y z is registered with h l u b and the price did not exceed 180 000 pesos therefore it is exempted from cw team to be this the price is more than 180 so this is subject to cwt and it's 1.5 percent because it does not exceed 500 000 pesos another we have the selling price the sale to see with the price of 890 so that's three percent again if the price is 500 but not more than two million so it's three percent but if it's more than three million like the sale today that is five percent and the sale to e which is an old office a real property but not an inventory that will be subject to six percent cwt regardless of the price if it's not inventory but it's a real property used in business that is subject to six percent cwt and for the sale to f this is a used car there is no applicable with only tax in that because this is a personal property and we can only withhold the tax if it is a real property so let us solve for the cwt so we have here the selling price our cw is zero because it's exempted the 400 times 1.5 that is 6 000 pesos 890 minus 3 percent that is 26 700 2.4 million times five percent that is 120 000 pesos and 1750 minus six times six percent rather that's 105 and of course 500 there is no cwd so a total of 257 700 so that means after this sale the buyers those different buyers buyer b buyer c d and e will already deduct these stock set these taxes from the price b will now pay 394. instead of 400 000 why because b will deduct 6 000 pesos from that amount or let's say d d will deduct 120 000 pesos from the two point four so instead of paying two point four million they would now pay that is two point four minus one twenty two hundred two million two hundred eighty thousand pesos because again they will withhold the tax so how about xyz what would be the tax treatment how would be the tax computed on the part of xyz so the gross income will be computed as the sale to a 160 minus 120 there is a gain of 40 000 pesos the sale to be 400 minus 250 is 150 pesos 1 000 pesos and the sale to see 890 minus 400 is 490 gain and the sale today that's 2.4 minus 1.6 800 order again and the sale to e we have one seven fifty minus one point one six hundred fifty order again and the sale to f that's five hundred minus three twenty we have a gain of 180 so summing this up together we will have a total gross income of two million three hundred ten thousand pesos but it's not yet the final answer xyz company had expenses a total of one million two hundred so we will deduct that from our gross income we will get our net taxable income of one million one hundred ten 000 so this is now our net taxable income and from that we will multiply that incorporate tax and that is 30 so the income tax due of x y z is 333 this is the amount that xyz company should pay to the br but remember remember that there are withholding taxes and those withholding taxes are creditable it means those withholding taxes can be charged against this income tax so instead of paying 333 000 pesos xyz will deduct the 257 000 700 pesos from that such income tax due so xyz will now pay the reduced amount which is seventy five thousand three hundred so humbaga ucwd [Music] xyz company instead of paying 333 000 pesos [Music] they will repeat those taxes to br those buyers who withheld the tax will be the one responsible to remit those taxes to be are going on the xyz corporation is to ask for two three zero seven the certificate forward holding tax without okay tapos when xyz corporation files its annual income tax return it will credit it will charge against its income tax due young tax credit we're holding taxes so the cwt of 257 700 is creditable against the income tax jew because this or those are advanced payments of the tax so that's it that's how we treat ordinary gains and losses so remember if it is used in business if it is inventory with the real or personal ordinary assets and we know personal properties which are considered as inventories and personal properties which are not inventories but are used in business any gains or losses are added to the gross income okay if for real properties which are inventory they will be subject to withholding tax as a rule but they can be exempted from withholding tax if the seller is registered under hlu rb and the price is not more than 180 000 or 1500 pesos or if the seller is suggested under boi or if the seller is the sss or gsis or field health or pcso again those three sellers will never be subject to it will exist but if it is registered with h l u r b but the price is more than 180 then that could be subject withholding tax and the tax would be 1.5 percent if it does not exceed 500 000 pesos or 3 if it is more than 500 but not more than 2 million and 5 if it is more than 2 million okay so those are for real properties classified as inventories for real properties non-inventory but used in business they will be subject to six percent cwt regardless of the price so i hope you learned a lot from this video and i hope you watched the other video about capital gain snaps okay thank you for watching