Overview
This lecture focuses on the tax treatment for the sale of real properties classified as capital assets, specifically the application and exemptions of the 6% capital gains tax in the Philippines.
Classification of Assets
- Dealings in properties can involve personal (movable), incorporeal (intangible), or real (immovable) properties.
- Ordinary assets are properties held as inventory or used in business.
- Capital assets are properties not classified as ordinary assets and are not used in business or held for sale.
Taxation of Capital Assets
- Sale of capital assets depends on their type: real property, incorporeal property (shares/stocks), or personal property.
- Real properties classified as capital assets in the Philippines are subject to a 6% capital gains tax (CGT) on gross selling price or fair market value, whichever is higher.
- If sold to the government, seller may choose between 6% CGT or 6% creditable withholding tax (CWT).
Computation Example
- CGT is computed as: Higher of selling price or fair market value × 6%.
- Buyer withholds and remits CGT to the BIR; seller receives net proceeds.
- Certificate Authorizing Registration (CAR) is needed for property transfer, issued only if taxes are settled.
Capital Gains Tax vs. Creditable Withholding Tax
- 6% CGT is a final tax; gains/losses are not reported in gross income.
- 6% CWT is creditable against the seller’s normal income tax and requires reporting gains/losses.
Special Transactions & Exemptions
- Pacto de retro (sale with right to repurchase) and conditional sales are also subject to CGT if the property is in the Philippines.
- Exemption from CGT applies if the principal residence is sold and proceeds are used to acquire a new principal residence, provided specific conditions are met:
- Seller is a Filipino citizen/resident alien.
- Notice to BIR within 30 days of sale.
- Full utilization of proceeds within 18 months.
- Escrow deposit equivalent to CGT.
- Exemption availed only once every 10 years.
Illustrative Scenarios
- If exemption requirements are unmet, seller pays 6% CGT on higher of selling price or market value.
- Full use of proceeds grants exemption; escrow is refunded if fully utilized.
- Partial use results in proportional taxation; only used amount affects new cost basis.
- Using more than sale proceeds adds the excess amount to the new principal residence’s cost basis.
Key Terms & Definitions
- Ordinary Asset — Property used in business or held as inventory.
- Capital Asset — Property not used in business or held as inventory.
- Real Property — Immovable property, such as land or buildings.
- Capital Gains Tax (CGT) — 6% tax on gains from sale of real property classified as a capital asset.
- Creditable Withholding Tax (CWT) — 6% tax option for sales to government, creditable against normal tax.
- Certificate Authorizing Registration (CAR) — Document from the BIR authorizing property registration post-tax payment.
- Pacto de Retro Sale — Sale granting the seller a right to repurchase the property.
Action Items / Next Steps
- Review and understand requirements for CGT exemption on principal residence.
- Watch the next video covering capital gains tax on sale of shares of stocks not traded in the local stock exchange.