hi guys welcome back to my new channel again this is g3hrs and in this video we will continue discussion on dealings and properties so in our previous video we have already classified what is an ordinary asset and what is the capital asset so we have already mentioned the rules the tax treatment for ordinary gains and ordinary losses arising from the sale of ordinary assets so in this video we will focus our discussion on the sale of real properties classified as capital assets if you're ready let's start [Music] so before anything else i'd like first to have a brief recap on what we have discussed already in our previous video so if you haven't watched yet i will link the video here so please watch that video so you will have a knowledge on how to tax the gains or losses arising from the sale of ordinary assets so when we say dealings in properties this is all about business transactions or sale of properties and when i say properties this can be personal properties when you say personal properties these are movable properties like cars or equipment so any movable properties are personal properties this can also be incorporeal properties when it's incorporeal properties this are anything that has no substance has no physical substance like shares of stocks or rights and another we have real properties real properties on the other hand are immovable properties this are permanently fixed in the land dealings in properties could be a sale of ordinary assets or a capital assets and also recall that we have already discussed the ordinary assets when we say ordinary assets these are properties any properties whether personal incorporeal or real properties which are classified as inventories and also as used in business when the property whether personal incorporeal or real properties are used in business or are classified as inventories they are considered as ordinary assets and they are taxed in its personal properties any gains or losses arising from the sale of order assets are added to the gross income meaning subject to the normal tax and if it is a sale of real properties this will be subject to creditable withholding taxes so we have discussed in our previous videos those withholding taxes the 1.5 percent the three percent in a five percent so please watch that video and since this real properties are order assets any gains or losses are also added or deducted to our gross income so in this video we will focus more on the capital assets which are as we know classified as non-inventories so these are not inventories these are not held for sale or those properties whether real or personal properties which are not used in business and they will be taxed if it is a personal property any gains or losses will be added to the gross income and if it is a real property it will be subject to the capital gains tax which will be our focus in this video so as a brief recap capital asset is defined by exclusion meaning those which are not considered as ordinary assets are classified as capital assets such as other than those enumerated as order assets all properties not used in business residential housing lots your own family dwelling your own family car receivables arising from the sale of inventory investment property so these things these properties are neither inventories nor properties used in business therefore they are all classified as capital assets so what will be our tax treatment for capital assets well the answer is it depends it depends on what kind of asset is being sold the capital asset may be a real property or incorporeal properties such as shares and stocks or personal properties when we say real properties again these are immovable and this could be subject to six percent capital gains tax or six percent creditable withholding taxes if the sale is made to the government or if it is an incorporeal property that could be subject to 15 capital gains tax if the stocks are not traded in the local stock exchange if it is personal property then it could be subject normal tax so there are three things that we should remember on how to treat capital gains first we need to know what kind of property is being sold is it a real property is it an incorporeal or personal properties so in this video we will focus our discussion on real properties alone so those incorporeal properties and personal properties will be discussed in another videos okay so i really hope that he would also watch those so let's focus our discussion on real properties so real properties as a rule sale disposition barter or exchange of real properties located in the philippines classified as capital assets is subject to six percent capital gains tax so that is very clear any real property located in the philippines and are classified as capital assets are subject to six percent capital gains tax when sold the tax base for the six percent cgt or capital gains tax is the gross selling price or current market value whichever is higher if sold to the government or any of its political subdivision the seller can choose six percent cgt or six percent cwt so we will have illustration for this one by one let's have an illustration juan de la cruz sold his agricultural land to maria cathy back for a price of 3 million pesos under the following terms so there is a down payment of one million two hundred and three years on payments that is 600 per year so 600 000 per year times three years that would be one million eight hundred so one eight hundred plus one point two a total of three million the land was acquired five years ago for one million three hundred and seventy thousand and now fairly valued at three million two hundred fifty thousand at a time of sale so let's first analyze the problem juan de la cruz is a filipino citizen a resident and juan de la cruz owned an agricultural land he sold this land to maria katibak for a price of 3 million the terms requires moriga to pay a down payment of 1.2 and an installment per year of 600 000 for three years the land was acquired five years ago and it's now fairly valued at three million two hundred fifty so first assumption if the buyer if maria is a non-government or any of its political subdivision therefore if it is not a government if the buyer is not in government the tax applicable will be six percent capital gains tax so first we will compare the selling price of three million versus the fair market value of three million two hundred and we will choose whichever is higher so we will choose the 3 million 250 as this is the higher amount so the capital gains tax shall be computed as 3 million 250 times 6 percent is equal to 195 000 pesos so this 185 000 pesos is our capital gains tax and to be withheld by the buyer and limited to the vr so what could be the effect of the transaction the buyer will only pay the price net of the capital gains tax meaning who won will only receive 3 million minus 185 000 so that is 2 million 805 000 so who one will not expect a higher or the gross amount because maria will withhold the tax and maria will be the one to pay and donate that tax to the br to effect the transfer the br will issue a certificate authorizing registration or the car which indicates the capital gains tax and other taxes have been paid with the br and is now ready for registration with the registry of deeds so if you are the buyer if you are maria you should be the one to withhold the capital gains tax and you should be the one to remit and pay that tax to the vr before you can secure a certificate authorizing registration what is a car this car is an official document to be presented to the registry of deeds you need this document before you can be entitled to your to the ownership of that real property if you are the buyer and you failed to withhold the tax and you failed to remove the tax to the br you cannot be issued a car and without this car you cannot register to the registry of deeds which in short you cannot be entitled to the ownership of that property it is your responsibility as the buyer to withhold the capital gains tax of six percent and remain the tax to the vr but remember it is not you the buyer who is being taxed here it is not your money it is not your tax the seller is the one who is being taxed here not you you are just a withholding agent collecting the tax from the seller so assumption two if the buyer is a government or its political subdivision so let us assume that huwan sold the real property to the government or any of its political subdivision so who won in this case the seller has the option to subject the sale to six percent capital gains tax or to six percent credit load holding tax so in this case we will follow the same computation we will compare which is higher the selling price or the fair market value and in this case the current fair market value is higher than a selling price so the seller who won can choose whether to subject the sale to six percent city or the six percent creditable holding tax so if the seller if who won opts to subject to six percent capital gains tax the capital gains tax shall be computed as three million two hundred fifty times six percent and that is one hundred and five thousand pesos but if the seller opts the six percent cwt or creditable holding tax the withholding tax shall be computed as three million two fifty times six percent that is one hundred ninety five 000 pesos the tax as to amount is the same for whatever option but there is a big difference okay so if the seller ups the six percent capital gains tax the capital gains tax of 195 000 shall become the final tax which means any gains or losses arising from such sale is no longer added or deducted to his gross income because the capital gains tax is a final tax and as the seller you are no longer required to report your gains or losses to your gross income but if the seller opts the six percent cwt the credit avoid holding tax on 185 000 shall be charged against his normal tax the graduated rates meaning any gains or losses arising from such sale is still added or deducted to his gross income okay so if it is a capital gains tax then that is a final tax and as a seller you are no longer required to report the gains or losses in your gross income but if you choose a six percent cwt you are still required to add or deduct the gains or losses on your gross income and whatever the tax due is you can use the six percent cwt against your income tax jew we have a computation about cwt in our previous video so i really really suggest that you watch that video so you would understand what is the effect of the six percent cwt let's talk about facto director sales a part of retro sale is defined as a transaction wherein the seller has the right to repurchase the property being sold to him or her this is done in order to immediately transfer the title and ownership of said property to the vendi already so in a pack of director sales there is actually a condition for example if i am the seller and i will sell my real property to a buyer i would give a condition that i will sell this real property but i will have a right to repurchase that property back that is a fact of the retro sale and in such case the capital gains tax also applies to factory through sale and other forms of conditional sale because there is a sale there is a chance from ownership therefore capital gains tax is still affected however the capital gains tax is only applicable to the properties located within the philippines and not those from abroad so if we have a general rule we also have an exemption the sale this position barter or exchange of real properties classified as capital asset may be exempted from the six percent capital gains tax or the six percent cwt if the following requisites are met so number one the capital assets sold was a principal residence so if the real property or capital assets sold was a family home a principal residence and the taxpayer is a citizen of the philippines or a resident alien and the proceeds of the sale was invested in acquiring a new principal residence so the seller would use the proceeds of such sale to acquire or to construct a new principal residence and there is a notice to make such utilization was given to the br within 30 days from the date of sale and the utilization of proceeds of the sale was made within 18 months from the date of the sale and there is a cash deposit called escrow account with an accredited bank for an amount equivalent to the capital gains tax due that should have been paid if not exempted and the exemption shall be availed only once in every 10 years let's have an illustration napoleon sold his principal residence at a selling price of 5 million pesos but with a current market value of 6 million pesos the property sold was acquired for 3 million pesos 7 years ago napoleon intends to use the proceeds of 5 million in acquiring his new residence at a target cost of 7.5 million pesos so in this case the seller sold his principal residence he intends to use the 5 million proceeds of the sale to acquire a new residence in which in his estimates would cost him 7.5 million pesos so assumption 1 napoleon failed to meet any of the requirements for exemption so since napoleon failed to meet any of the requirements for exemption he would be subject to capital gains tax of six percent so the capital gains tax due is six percent of the six million why six million because even if the selling price is five million the higher amount is six million the current fair market value so six million times six percent capital gain sucks that is three hundred sixty thousand pesos it must be withheld by the buyer of the property and must be remitted to the mayor otherwise the title cannot be transferred to the said buyer and a 306 000 cgt shall be withheld from the proceeds remember that the price is 5 million and the current fair market value is 6 million our tax base is the higher amount the six million which means six million times six percent that is 360 000 but the buyer will withhold such 360 000 from the proceeds from the selling price which means 5 million minus 360. the seller would receive only an amount of 4 million hundred forty thousand pesos assumption two all requirements were met and the entire proceeds was used in acquiring the new principal reasons no more no less so in this second assumption it is assumed that all requirements are met meaning napoleon is entitled for exemption the sale will be exempted from the capital gains tax but napoleon shall be required to deposit in a bank escrow fund equivalent to six percent cgt again as i have said earlier even if napoleon is not subject to six percentility because he is exempted still he would be required to deposit the equivalent of six percent cgt to an escrow fund this escrow fund serves as a security in case a taxpayer fails to utilize the entire 5 million pesos proceeds within 18 months after the sale as a security the br requires that every person claiming for exemption from the from the capital gains tax will deposit an escrow fund equivalent to the six percent this will be set aside and will serve a secret deposit and if the taxpayer seller fully utilize the entire proceeds then the escrow fund will be refunded to him but if he failed to utilize the proceeds then it will be appropriated as a payment for the capital gains tax on the other hand the cost of the new principal residence will be 3 million the same as the cost of the old residents despite the fact that the entire proceeds of 5 million was used in acquiring the new principal residence so take note that in this assumption napoleon really used the entire 5 million no more no less even if napoleon used the entire 5 million pesos they the cost of the new principal residence would still be 3 million as if there was no sale as if it was still the old principal residence again the cost of the old principal residence is equal to the cost of the new principal residence which means if the cost of the old residents is 3 million the cost of the new residents would still be 3 million you might be asking why is that napoleon used the entire five million pesos isn't it tried to also record the cost of the new principal residence and amount amounting to 5 million pesos the answer is no because you sold the old residents to acquire a new residence and then the entire proceeds was used to acquire the new residents then in the eyes of the law for bar the cost of the new principal residents is still the same as the old residents so even if you spend the entire 5 million still it would be 3 million for br assumption 3 all requirements were met but only 4 million out of 5 million was utilized in acquiring his new principal residence so in this case remember that napoleon sold his old residence for 5 million and he intends to use that 5 million to acquire a new principal residence but in reality he only used 4 million out of it so what could be the effect the taxpayer will still be required to deposit the entire capital gains tax okay it is always a requirement if you intend if you decided to use the proceeds to acquire new principal residence you will be required to deposit in an escrow fund equivalent to the supposedly capital gains tax the entire capital gains tax that is a security deposit and since napoleon failed to utilize the entire proceeds and only used 4 million out of 5 million therefore there is an unutilized portion of 1 million such portion shall be subject to capital gains tax and the capital gains tax is computed as follows so we have 1 million the unutilized portion divided by the entire proceeds that is 5 million times the capital gains tax 360. that would be 72 000 pesos okay so that is the capital gains tax to be taken out from the escrow fund so remember that napoleon deposited in an escrow fund amounting to 360. so instead of refunding the entire 360 to him it will be decreased by 72 000 pesos so the bank will be responsible for the remittance so there will be an exemption still but that only amounts to 4 million over 5 million times 360. so instead of refunding the entire 360 to napoleon 288 milan okay so napoleon will not receive the entire 360. 360 minus 72 that is 288 so 288 will be refunded to napoleon but the 72 will be considered as a capital gains tax on the other hand the cost of the new principal residence will be computed as follows so remember that napoleon intends to use the entire proceeds of 5 million but he only actually used 4 million out of that 5 million also remember that the cost of the of the old residents was 3 million now we will proportionate that 3 million in respect to the amount actually used to acquire a new principal residence so we have here 4 million over 5 million that is the amount actually used by napoleon to acquire the new principal residence out of the 5 million proceeds times the cost of the old residents so the cost of the new principal residence is two million four hundred so when napoleon in assumption two used the entire proceeds no more no less the cost of the new principal residence is equal to the cost of the old principal residence but in this assumption when napoleon used only a portion of the proceeds and not the entire proceeds meaning he used only a lesser amount the cost of the new principal residence is equal to the proportion of the cost of the old principal residents in respect to the utilized portion of the proceeds of the sale okay last assumption all requirements were met and 7.5 million was utilized in acquiring his new principal residence so take note that the proceeds is only 5 million and in this assumption all requirements were met meaning to say he is exempted from the capital gains but instead of using 5 million pesos alone he used 7.5 million therefore napoleon adds another 2.5 million to acquire the new principal residence so in this case the taxpayer adds certain amount of money in addition to the proceeds to acquire the new principal residence thus the taxpayer will remain exempted from the capital gains tax but again he is required to deposit an escrow fund again exempted or not you are required to deposit into an escrow fund this is a security on the part of the vr that you will really faithfully comply all the requirements so if you fail to utilize the proceeds within 18 months that escrow fund will be appropriated to pay the corresponding capital gains tax but if you really fully utilize the entire proceeds from the sale then the escrow fund will be refunded back to you okay so it will be refunded in full to him upon showing of proof that the sale was really exempted because he really fully utilized the proceeds of the sale on the other hand the cost basis of the new principal residence is computed as follows so remember that napoleon used 7.5 billion this is the new investment in his new principal residence but 5 million of that is coming from the sale the proceeds therefore he actually adds 2.5 million to acquire the new principal residence therefore this additional investment will be added to the cost of the old principal residents remember the cost of the old residence was 3 million so we will add 3 million and 2.5 therefore the cost of the new principal residence is now 5 million 500. okay so that's it general rule real properties classified as capital asset will be subject to six percent capital gains tax except if the buyer is a government in which case the seller has the option to subject to six percent capital gains tax or to six percent cwd and there is an exemption if the real property sold was a principal residence and there's an intention to use the proceeds to acquire the new principal residence okay thank you so much for watching we still have another video on the capital gains tax on sale on shares of stocks not said in the local sub-exchange