Dealings in Property

Dealings in property refers to the disposal through sale or exchange of ordinary

assets or capital assets.

Under the tax code, the following are ORDINARY ASSETS:

1. Stock in trade of the taxpayer or other property of a kind which would properly
be included in the inventory of the taxpayer properly held by the taxpayer
primarily for sale such as:
a. Merchandise inventory
b. Real estate held or being sold by real estate dealers.
c. Securities held or being sold by dealers in securities.
2. Properly used in trade or business subject to depreciation (property, plant and
equipment).
3. Real property used in trade or business by the taxpayer (including real
property held for rent).

Capital assets

· Include all other property held by the taxpayer, whether or not connected with
his trade or business not included in the definition or ordinary assets above.

Examples:
- Stock and securities held by taxpayers other than dealers in securities.
- Interest in partnership and joint venture
- Goodwill
- Real property not used in trade or business (i. e., residential house and lot)
- Investment property

Property classification of an asset as capital or ordinary is important because of

the special tax rules or gains and losses from sales or exchanges of capital assets
which do not apply to gains and losses from sale or exchanges of ordinary assets.

“Gains and Losses from dealings in property”

Difference between the amount of value received by the taxpayer over the
determined value of the property he has disposed of arising from sale, and/or
exchange of assets. Gains and losses may be classified as capital gain (loss) or
ordinary gain (loss).

DEFINITION OF TERMS

Capital gain – Gain from the sale, exchange, or other disposition of capital asset
Ordinary gain – Gain realized from the sale or exchange of ordinary asset
including gains from performance of services and business.
Capital loss – Loss from the sale, exchange, or other disposition of capital asset.
Ordinary loss – Loss incurred from the sale or exchange of ordinary asset. (It also
means the excess of deductions over the gross income of a taxpayer during a
taxable year, or net operating loss).
Net Capital Gain – Excess of the gains from sales or exchanges of capital assets
over the losses from such sales or exchanges.
Holding Period – Length of time the asset was held by the taxpayer. It covers the
period from the date of acquisition to the date of sale or exchange.
Net Capital Loss – Excess of the losses from sales or exchanges of capital assets
over the gains from such sales or exchanges
Dealers in Securities – All persons, who for their own account are engaged in the
sale of stocks, bonds, exchanges, bullions, coined money, bank notes, promissory
notes, or other securities as licensed by the SEC.

TAX IMPLICATIONS

a Subject to percentage taxes.

1. Sale, barter, or exchanges of shares of stocks listed or traded through the local
stock exchange. – ½ of 1% of the gross selling price or gross value in money of
the shares of stock sold.

2. Shares of stock sold or exchange through initial public offering.

- On sale, exchange, or other disposition through initial public offering of shares
of stocks in closely held corporation, based on the gross selling price or gross
value in money of the shares of stock sols, etc., in accordance with the proportion
of the shares of stock sold, etc., to the total outstanding shares of stock after
listing in the local stock exchange.

Up to 25% = 4%
Over 25% but not over 33 or 1/3% = 2%
Over 33 1/3 = 1%

b Subject to final income tax – CAPITAL GAINS TAX:

1. Capital gains from the sale of shares of stock not traded in the stock exchange

Not over P100,000 = 5%

Over any amount in excess of P100,000 = 10%

2. Capital gains from the sale in excess of P100,000

Based on gross selling price or fair market value

Whichever is higher 6%

c Subject to REGULAR INCOME TAX – all other capital asset transactions

Tax RULES on capital gains and losses:

1. The transaction must involve property classified as capital asset.

2. The transaction must arise, generally, from sale or exchange.
3. Net capital gain is added to ordinary gain, however, if the result is a net capital
loss, such loss can only be deducted from the net capital gain.

Individual Taxpayers
1- Percentage to be recognized based on holding period
(the length of time the asset was held by the taxpayer
· 100% - if capital asset has been held for 12 months or less
· 50% - if capital asset has been held for more than 12 months

2- Capital Losses shall be allowed only to the extent of capital gains

3- Net Capital loss carry over is allowed
· If any taxpayer other than a corporation, Sustains in any taxable year a net
capital
loss (in an amount not in excess of the net income for such year, shall be treated
in
the succeeding year as a short term capital loss (100% deductible form of capital
gain).
· The net income referred to is BEFORE Personal exemptions

4- Capital losses are deductions only from capital gains

Corporations

1. Percentage to be recognized of the holding period

2. Capital losses shall be allowed to the extent of capital gains.

3. Net Capital loss carry is NOT allowed.

4. Capital losses are allowed only to the extent of capital gains.

Any loss sustained by a domestic or any trust company from sale of bonds,
debentures, notes, or certificate or other evidences of indebtedness issued by any
corporation, including those issued by the government is considered as these are
subject to final capital gains taxes.