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Real and other properties ROPA, including stocks and securities acquired by banks
shall be treated as ordinary assets.
In disposing property with a selling price, costs to be capitalized are:
Acquisition cost reconditioning, testing
Incidental expenses processing, commission
Special Rules in determining acquisition cost (Cost basis)
If the property was acquired by purchase on or after March 1, 1913
Fair market value of property acquired
Less: Acquisition cost of property surrendered
If the property was acquired by inheritance
Sales price
Less: FMV of property when inherited
If the property was acquired as a gift
Sales price
Less: FMV when given
If the property was acquired less than full and adequate consideration
Sales price
Less: Amount paid by the transferee (owner of the property)
Ordinary Gain (Loss)
Ordinary Asset
Sale
Less: Cost
Less: Operating Expenses
Capital Gain(Loss)
Capital Asset
Sale
Less: Cost
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Ordinary loss is allowed to be ducted from business income and capital gains;
However, Capital loss is only allowed to be deducted from capital gains.
Transactions for Real property NOT used in business is a capital asset transaction,
therefore CGT of 6% of Selling price/Zonal Value, whichever higher.
Ex.
SP = 1,000,000
ZV = 1,200,000
CGT is 1,200,000 6% = 72,000
72,000 is a Final tax
Disposition of Principal Residence is also subject to 6% CGT.
But from disposition, if the proceeds are utilized to acquire new principal
residence, the transaction can be exempted from CGT, conditions:
a) 30 day notification from date of disposition to Commissioner
b) Can be availed only one every 10 years
c) Unutilized portion is subject to CGT 6%; and shall be paid within 30
days after 18 month utilization period. *20% surcharge per annum.
When the Principal residence is disposed and has availed the tax exemption
(Utilization):
a) Sales fully utilized
The old cost of the residence is the basis(new cost).
b) Portion/Partially applied
The percentage of utilized portion is the basis(cost) of new principal
residence.
c) Utilized cost exceed the sale proceed
Basis of the old cost; plus the Additional cost incurred (Total cost minus
sales proceed)
Sale or Exchange of Real Property Used in Business is an ordinary asset transaction,
thus subject to normal tax.
Rule 1 Real Property is Inventory
Gross selling price* (consideration received) or Fair market value
(Zonal value), whichever is higher.
Higher of GSP/FMV
XX
Multiply by Creditable tax rate
Selling price 500,000 or less
1.5%
500,000 - 2,000,000
3.0%
2,000,000 more
5.0%
Creditable withholding tax
XX
CWT is not a final tax, hence it is deducted from year-end income tax
due.
Income derived from real properties (as inventory) will be deducted
with this tax because the income itself is from the sale of properties.
Rule 2 Ordinary asset other than inventory
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*Initial payment
Downpayment
Add: Excess of mortgage over cost
*Contract Price
Selling price
Add: Excess of Mortgage over cost
Less: Mortgage assumed by the buyer
Wash sale is acquiring or purchasing of stocks that are substantially identical.
Conditions:
a) The sale is at loss;
b) 30 day before or after the sale;
c) Not a dealer of stock, or Dealer but not in ordinary course of business.
General rule; losses from wash sales are not deductible while gains are taxable.
If securities sold are more than securities purchases, then number of disposed
stocks will be matched to acquired stocks.
Short Sales is a capital asset transaction that is either:
a) short sale of a property; or
Selling price of speculator (e.g. a representative to buy)
Less: Purchase price (FMV of securities)
Capital gain/loss
*the speculator will usually postpones the delivery so that the
purchase price is lower thus having capital gain.
b) failure to exercise option to buy or sell.
Ex. The option money or the money given ahead of the time to
purchase a capital asset is a loss for the part of the buyer if he does not exercise the
privilege to buy such capita asset.
Worthless securities, rules:
a) written off;
b) bank and trust company cannot write off securities;
c) written of amount is capital loss.
Liquidating dividends
Total amount received
Less: Cost of shares invested
Taxable gain/Deductible loss
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Corp B
FMV of Corp A Net assets
Less: Par value of shares
Nontaxable gain/Nondeductible loss
Note that to compute either Corps side gain/loss, the value (book/par) which
is definite in their side of the books is used. And The FMV of the opposite party is
used.
#47 and 48 are examples of loss/gain not to be recognize because they are a
party there to the merger/consolidation.
Recognition of gain but not loss if:
a) Gain to recognize should not exceed the sum of money and the FMV of
property
Cost of stock transferred
Less: Money received*
FMV of property*
Total
Add: Gain on the exchange
*money+property received
Amount treated as dividend
usually
offset
by