1

FREQUENTLY ASKED QUESTIONS: CAPITAL GAINS TAX

1) What is meant by capital asset?
Capital asset means property held
by the taxpayer (whether or not
connected with his trade or
business), but does not include
a) stock in trade of the taxpayer or
other property of a kind which
would properly be included in the
inventory of the taxpayer if on
hand at the close of the taxable
year;
or
b) property held by the taxpayer
primarily for sale to customers in
the ordinary course of his trade or
business;
or
c) property used in the trade or
business of a character which is
subject to the allowance for
depreciation provided in subsection
(F) of Sec. 34 of the Code; or
d) real property used in trade or
business of the taxpayer.
2) What is meant by ordinary
asset?
Ordinary asset refers to all
properties specifically excluded
from the definition of capital assets
under Sec. 39 (A)(1) of the NIRC.
3.) What is meant by "Stock
classified as Capital Asset"? (Sec
2(a) of RR 6-2008)
This refers to stocks and securities
held by taxpayers other than
dealers in securities.
4.) What is meant by "Dealer in
Securities"? (Sec 2(b) of RR 62008)
Dealer in Securities 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 resells them to customers with a
view to the gains and profits that
may be derived therefrom. "Dealer
in securities" means any person

who buys and sells securities for

his/her own account in the ordinary
course of business (Sec. 3.4, SRC).
5.) What is meant by real property?
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.
6.) What does a real estate dealer
refer to?
A 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.
7.) What does a
developer refer to?

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.
8.)What does a real estate lessor
refer to?
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.
9.) Who are considered engaged in
the real estate business?
Taxpayers who are considered
engaged in the real estate business
refer collectively to real estate
dealers, real estate developers
and/or real estate lessors. A
taxpayer whose primary purpose of
engaging in business, or whose
Articles of Incorporation states that

FREQUENTLY ASKED QUESTIONS: CAPITAL GAINS TAX

its primary purpose is to engage in
the real estate business shall be
deemed to be engaged in the real
estate business.
10.) Who are considered not
engaged
in
the
real
estate
business?
Taxpayers who are considered not
engaged in the real estate business
refer to persons other than real
estate
dealers,
real
estate
developers and/or real estate
lessors.
11.) Who are considered habitually
engaged
in
the
real
estate
business?
Real estate dealers or real estate
developers who are registered with
the
Housing
and
Land
Use
Regulatory Board (HULRB) or
HUDCC
12.) How can you determine
whether a particular real property
is a capital asset or an ordinary
asset?
a)
Real
properties
shall
be
classified with respect to taxpayers
engaged in the real estate business
as follows:
i) All real properties acquired by
the real estate dealer shall be
considered as ordinary assets.
ii) 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.

iii) 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.
iv) All real properties acquired
the course of trade or business
a taxpayer habitually engaged
the sale of real property shall
considered as ordinary assets.

in
by
in
be

Note: Registration with the HLURB

or HUDCC as a real estate dealer or
developer shall be sufficient for a
taxpayer to be considered as
habitually engaged in the sale of
real estate.
If the taxpayer is not registered
with the HLURB or HUDCC as a real
estate dealer or developer, he/it
may nevertheless be deemed to be
engaged in the real estate business
through the establishment of
substantial relevant evidence (such
as
consummation
during
the
preceding year of at least six (6)
taxable
real
estate
sale
transactions, regardless of amount;
registration as habitually engaged
in real estate business with the
Local Government Unit or the
Bureau of Internal Revenue, etc.
A property purchased for future use
in the business, even though this
purpose is later thwarted by
circumstances
beyond
the
taxpayers control, does not lose its
character as an ordinary asset. Nor
does a mere discontinuance of the
active use of the property change
its character previously established
as a business property. (Sec 3(a)
(4)of RR 7-2003)
b) 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.

FREQUENTLY ASKED QUESTIONS: CAPITAL GAINS TAX

c) 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.
d) 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.
e) 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.
Provided however, that properties
classified as ordinary assets for
being used in business by a
taxpayer engaged in business
other than real estate business are
automatically
converted
into
capital assets upon showing proof
that the same have not been used
in business for more than two years
prior to the consummation of the
taxable transactions involving said
properties
f) 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.
The
classification of such property in
the hands of the buyer/transferee
shall be determined in accordance
with the following rules:
i) Real property transferred through
succession or donation to the heir
or donee who is not engaged in the
real estate business with respect to
the real property inherited or
donated, and who does not
subsequently use such property in
trade
or
business,
shall
be
considered as a capital asset in the
hands of the heir or donee.

ii) Real property received as

dividend by the stockholders who
are not engaged in the real estate
business
and
who
do
not
subsequently use such property in
trade
or
business,
shall
be
considered as a capital asset in the
hands of the recipients even if the
corporation which declared the real
property dividends is engaged in
real estate business.
iii) The real property received in an
exchange shall be treated as
ordinary asset in the hands of the
case of a tax-free exchange by
taxpayer not engaged in real
estate business to a taxpayer who
is engaged in real estate business,
or to a taxpayer who, even if not
engaged in real estate business,
will use in business the property
received in exchange.
g) 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.
13.) What is the basis in the
valuation of property?
The value of the real property will
be based on the selling price, fair
market value as determined by the
Commissioner (zonal value) or the
fair market value as shown in the
schedule of values of the Provincial
or City Assessor, whichever is
higher.
If there is no zonal value, the
taxable base is whichever is higher
of the gross selling price per sales
documents or the fair market value
that appears in the latest tax
declaration.
If there is an improvement, the
FMV per latest tax declaration at
the time of the sale or disposition,
duly certified by the City/Municipal
Assessor shall be used. No
adjustments shall be added on the

FREQUENTLY ASKED QUESTIONS: CAPITAL GAINS TAX

said value, provided that the tax
declaration bears the upgraded fair
market value of the said property
pursuant to Section 219 of R.A. No.
7160, otherwise known as the Local
Government Code of 1991 and the
last paragraph of the Local
Assessment Regulations No. 1-92
dated October 6, 1992.
In case the tax declaration being
presented was issued three (3) or
more years prior to the date of sale
or disposition of the real property,
the
seller/transferor
shall
be
required to submit a certification
from the City/Municipal Assessor
whether or not the same is still the
latest tax declaration covering the
said real property. Otherwise, the
taxpayer shall secure its latest tax
declaration and shall submit a copy
thereof duly certified by the said
Assessor. (RAMO 1-2001)
For shares of stocks, it will be
based on the net capital gains
realized from the sale, barter,
exchange or other disposition of
shares of stocks in a domestic
corporation, considered as capital
assets not traded through the local
stock exchange.
14.) What is meant by "Net Capital
Gains"? (Sec 2(o) of RR 6-2008)
"Net Capital Gain" means the
excess of the gains from sales or
exchanges of capital assets over
the losses from such sales or
exchanges.
15.) What are the rules for the
determination of amount and
recognition of gain or loss in the
sale, barter, or exchange of shares
of stock not traded through the
Local Stock exchange? (Sec 7(c ) of
RR 6-2008)
(A.) Determination of Selling Price.
In determining the selling price,
the following rules shall apply:
(a.1) In the case of cash sale, the
selling price shall be the total
consideration per deed of sale.
(a.2) If the total consideration of
the sale or disposition consists

partly in money and partly in kind,

the selling price shall be sum of
money and the fair market value of
the
property
received.
(a.3) In the case of exchange, the
selling price shall be the fair
market value of the property
received.
(a.4) In case the fair market value
of the shares of stock sold,
bartered, or exchanged is greater
than the amount of money and/or
fair market value of the property
received, the excess of the fair
market value of the shares of stock
sold, bartered or exchanged over
the amount of money and the fair
market value of the property, if
any, received as consideration shall
be deemed a gift subject to the
donor's tax under sec. 100 of the
Tax Code, as amended.
(B.) Definition of "fair market
value" of the Shares of Stock.
(b.1) In the case of listed shares
which were sold, transferred or
exchanged outside of the trading
system and/or facilities of the Local
Stock Exchange, the closing price
on the day when the shares are
sold, transferred, or exchanged.
When no sale is made in the Local
Stock Exchange on the day when
the
Listed
shares
are
sold,
transferred, or exchanged, the
closing price on the day nearest to
the date of sale, transfer or
exchange of the shares shall be the
fair market value. Sec 2 of RR 62013
(b.2) In the case of shares of stock
not listed and traded in the local
stock exchanges, the value of the
shares of stock at the time of sale
shall be the fair market value. In
determining the value of the
shares, the Adjusted Net Asset
Method shall be used whereby all
assets and liabilities are adjusted
to fair market values. The net of
adjusted asset minus the liability
values is the indicated value of the
equity.
The appraised value of real
property at the time of sale shall be
the higher of

FREQUENTLY ASKED QUESTIONS: CAPITAL GAINS TAX

(1) The fair market value as
determined by the Commissioner,
or
(2) The fair market value as shown
in the schedule of valued fixed by
the Provincial and City Assessors,
or
(3) The fair market value as
determined
by
Independent
Appraiser.
(b.3) In the case of a unit of
participation in any association,
recreation or amusement club
(such as golf, polo, or similar
clubs), the fair market value
thereof shall be its selling price or
the bid price nearest published in
any newspaper or publication of
general circulation, whichever is
higher.
(C.) Determination of Gain or Loss
from Sale or Disposition of Shares
of Stock. The gain from the sale
or other disposition Stock. The
gain from the sale or other
disposition of shares of stock shall
be the excess of the amount
realized therefrom over the basis or
adjusted basis for determining
gain, and the loss shall be the
excess of the basis or adjusted
basis for determining loss over the
amount realized. The amount
realized from the sale or other
disposition of property shall be the
sum of money received plus the
fair market value of the property
(other than money) received, if any.
16.) What are the applicable tax
rates of Capital Gains Tax under the
National Internal Revenue Code of
1997?

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.
18.) What is the procedure in the
filing of Final Capital Gains Tax
return?
File the Final 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 seller or
transferor is registered, for shares
of stocks or where the property is
located, for real property. In places
where there are no AAB, the return
will be filed directly with the
Revenue Collection Officer or
Authorized
City
or
Municipal
Treasurer.
19.) Who/what are considered
exempt from the payment of Final
Capital Gains Tax?

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%

17.) Who are required to file the

Final Capital Gains Tax return?

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 nonindividual
exchanging
real
property solely for
shares
of
stocks
resulting in corporate
control
A government entity
or
governmentowned or controlled
corporation
selling
real property

FREQUENTLY ASKED QUESTIONS: CAPITAL GAINS TAX

If the disposition of
the real property is
gratuitous in nature
Where
the
disposition
is
pursuant to the CARP
law

20.) Who are conditionally exempt

from the payment of Final Capital
Gains Tax?
Natural persons who dispose their
principal residence, provided that
the following criteria are met:

The proceeds of the

sale of the principal
residence have been
fully
utilized
in
acquiring
or
constructing
new
principal
residence
within eighteen (18)
calendar
months
from the date of sale
or disposition;
The historical cost or
adjusted basis of the
real property sold or
disposed
will
be
carried over to the
new
principal
residence built or
acquired;
The
Commissioner
has
been
duly
notified, through a
prescribed
return,
within
thirty
(30)
days from the date
of sale or disposition
of
the
persons
intention to avail of
the tax exemption;
Exemption
was
availed only once
every ten (10) years;
and
There is no full
utilization
of
the
proceeds of sale or
disposition.
The
portion of the gain
presumed to have
been realized from
the
sale
or
disposition will be

subject to Capital
Gains Tax.
In
case
of
sale/transfer
of
principal residence,
the Buyer/Transferee
shall withhold from
the seller and shall
deduct
from
the
agreed
selling
price/consideration
the 6% capital gains
tax which shall be
deposited in cash or
managers check in
interest-bearing
account
with
an
Authorized
Agent
Bank (AAB) under an
Escrow
Agreement
between
the
concerned Revenue
District Officer, the
Seller
and
the
Transferee, and the
AAB to the effect
that the amount so
deposited, including
its
interest
yield,
shall
only
be
released
to
such
Transferor
upon
certification by the
said RDO that the
proceeds
of
the
sale/disposition
thereof has, in fact,
been utilized in the
acquisition
or
construction of the
Seller/Transferors
new
principal
residence
within
eighteen
(18)
calendar
months
from date of the said
sale or disposition.
The date of sale or
disposition
of
a
property refers to the
date of notarization
of
the
document
evidencing
the
transfer
of
said
property. In general,
the term Escrow
means
a
scroll,
writing
or
deed,
delivered
by
the
grantor, promisor or
obligor
into
the

FREQUENTLY ASKED QUESTIONS: CAPITAL GAINS TAX

hands of a third
person, to be held by
the latter until the
happening
of
a
contingency
or
performance of a
condition, and then
by him delivered to
the grantee, promise
or obligee.
21.)
What
is
a
Certificate
Authorizing Registration?
Certificate Authorizing Registration
(CAR) is a certification issued by
the Commissioner or his duly
authorized representative attesting
that the transfer and conveyance
of land, buildings/improvements or
shares of stock arising from sale,
barter or exchange have been
reported and the taxes due
inclusive of the documentary
stamp tax, have been fully paid.
With the implementation of the
Electronic Certificate Authorizing
Registration (eCAR) System, the
CAR shall now be electronically
generated.
22.) What is eCAR System?
eCAR
stands
for
Electronic
Certificate Authorizing Registration.
A
web-based
facility
that
automates the generation of CAR
with barcode, eCAR will also enable
electronic linkage between the BIR
and
the
Land
Registration
Authority. (Participant Guide)

CARs which are more than two (2)

years from the date of issuance,
are
not
anymore
valid
for
presentation to the Registry of
Deeds. The said CARs shall be
replaced with an eCAR by the
concerned Revenue District Offices
or Large Taxpayers Divisions. A
certification fee shall be charged
for
each
released
eCAR
issued/reprinted after affixture of
P15.00 Documentary Stamp Tax on
Certificates (Sec 188 of the NIRC of
1997)
and
the
prescribed
Certification Fee of One Hundred
Pesos (P100.00) under Executive
Order
No.
197
to
the
taxpayer/authorized
representative.
23.) How do we determine the fair
market value of shares of stocks
not traded through the Local Stock
Exchange?
In determining the value of the
shares, the Adjusted Net Asset
Method shall be used whereby all
assets and liabilities are adjusted
to fair market values. The net of
adjusted asset minus the adjusted
liability value is the indicated value
of the equity.
For purposes of this item, the
appraised value of real property at
the time of sale shall be the
highest among the following:
(a) The fair market value as
determined by the Commissioner,
or

eCARs shall have a validity of one (b) The fair market value as shown in
the schedule of values fixed by the
(1) year from date of issue. For
Provincial and City Assessors, or
other manually issued CARs that
are outstanding and not yet
presented to the Register of Deeds,
(c) The fair market value as
i.e., CARs more than one (1) year
determined by Independent
from the date of issuance which are
Appraiser. (RR NO. 6-2013)
due for revalidation and expired