(d) Income from Dealings in Property

Doctrine of Involuntary Conversion of Property

This is a doctrine enunciated in the US case of Herder v. Helvering, 106 F.2d 153¹ and was adopted by the BIR in several of its rulings.

Under Philippine law, involuntary conversion does not, by itself, result in nonrecognition of gain or loss. The tax treatment depends on the applicable provisions of the NIRC, including Sections 32 and 40(C), and any specific applicable exemption or nonrecognition provision.

(b) Types of gains

Ordinary gain is derived from the sale or exchange of ordinary assets including gains from performance of services and business; included in the gross income.

Ordinary loss may arise from the sale or exchange of an ordinary asset; deductible in computing taxable income when the requirements for losses under Sec. 34(D) of the NIRC are met.

Capital gain is the excess of value received over the determined cost from the sale or exchange of capital asset. The following are the rules on the taxability of capital gains:

• Sale of unlisted shares of stock in a domestic corporation – subject to CGT
• Sale or disposition of real property in the Philippines classified as a capital asset – generally subject to the 6% CGT; gain from ordinary-asset real property is generally subject to ordinary income-tax rules
• Other capital assets: excess of the gains from sales or exchanges of other capital assets over the losses from such sales or exchanges; included in the gross income

Capital loss is the excess of the losses from sales or exchanges of other capital assets over the gains from such sales or exchanges; deductible only from capital gains.

Actual gain v. Presumed gain

Actual gain is the amount realized from the sale of the asset in excess of the cost to the taxpayer.

Presumed gain is the presumption of the law of the existence of a gain from sale of real property which subjects the said sale to CGT of 6% based on the selling price or FMV, whichever is HIGHER. Acquisition cost is not taken in to account.

Long-term capital gain v. Short-term capital gain

In case of individuals, the percentages of gain or loss to be taken into account shall be:

• 100% if the capital asset has been held for 12 months or less; and
• 50% if the capital asset has been held for more than 12 months

In case of a corporation, the holding period is not applicable. The capital gain and loss are to be reported in the full amount regardless of the number of years the capital asset is held.

Net capital gain v. Net capital loss

Basis for determining gain (loss) from sale/disposition of property

(c) Special rules pertaining to income or loss from dealings in property classified as capital asset (loss limitation rule, loss carry-over rule, holding period rule)

vi. Income from dealings in real property classified as capital assets situated in the Philippines

General rule: Involves the sale or other disposition of real property classified as capital asset located in the Philippines by a non-dealer in real estate

If the sale is made by a dealer in real estate or if the real property is an ordinary asset, the resulting gain or loss will be considered in the computation of ordinary income.

Tax Rate: 6%

Tax Base: The HIGHER between

• Gross selling price;
• Prescribed zonal value of real properties as determined by the CIR; or
• Fair market value as determined by the provincial and city assessors.

Note: Gain or loss from the sale of a capital asset is immaterial since there is a conclusive presumption of gain.

An individual taxpayer has the option to treat the capital gain as subject to 6% CGT or 0%-35% graduated tax IF the buyer of the real property is the Government or any of its political subdivisions or agencies or instrumentalities, including GOCCs.

Exception

Capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, may be exempt from the capital gains tax, subject to certain conditions.

Requisites:

• Sale or disposition of the old actual principal residence;
• By a citizen or resident alien;
• Proceeds of which are utilized in acquiring or constructing a new principal residence within 18 calendar months from date of sale or disposition;
• Notice to the CIR within 30 days from the date of sale or disposition through a prescribed return of his intention to avail tax exemption;
• Can be availed of only once every 10 years;
• The historical cost or adjusted basis of his old principal residence shall be carried over to the cost basis of his new principal residence;
• If there is no full utilization, the portion of the gains presumed to have been realized shall be subject to capital gains tax; and
• The 6% capital gains tax due shall be deposited with an authorized agent bank subject to release upon certification by the RDO that the proceeds of the sale have been utilized.

The date of sale or disposition of a property refers to the date of notarization of the document evidencing the transfer of said property. (Revenue Regulations No. 13-99³, as amended by Revenue Regulations No. 14-00⁴)

Dealings in shares of stock of Philippine corporations

(a) Listed and traded in the stock exchange (Stock Transaction Tax)

Tax Rate — one-tenth of one percent (0.1%)

Tax Base — Gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be assumed and paid by the seller or transferor through the remittance of the stock transaction tax by the seller or transferor's broker. (RMC No. 21-08)⁵

(b) Not listed and not traded in the stock exchange (Capital Gains Tax)

Tax Rate — final tax at the rate of fifteen percent (15%)

Tax Base – net capital gains realized during the taxable year from the sale, barter, exchange or disposition of shares of stock not listed and not traded in the stock exchange.

Net Capital Loss Carry-over

Corporations cannot carry over a net capital loss.

If any taxpayer, other than corporations, sustained a net capital loss in any taxable year, such loss is treated in the succeeding taxable year as a loss from the sale/exchange of a capital asset held for not more than 12 months (100% deduction)

Such net capital loss that should be carried over should not exceed the net income for the year Incurred (prior year’s net income)

Example:

Net income in 2011 = P6,000

Net capital loss in 2011 = P10,000

Amount deductible in 2012 is P6,000 only since it should not exceed the net income of the taxable year where the loss was incurred. Note that the allowable capital loss to be deducted in 2012 (i.e. P6,000) is only to the extent of the capital gain for 2012.

Net income should be understood as TAXABLE income according E.O. 37⁶.

Summary of Rules with regard to NCLCO

• Allowed to any taxpayers, other than corporations;
• The net loss can be carried over only to the extent of net income for the year sustained (loss limitation rule);
• The net loss carry-over is deductible only for the succeeding year (loss carry-over rule);
• A net capital loss carried over to the succeeding taxable year is treated as a loss from the sale or exchange of a capital asset held for not more than 12 months, regardless of its actual holding period (Sec. 39(D), NIRC);
• Do not apply to sale or disposition of the following capital assets:
• shares of stock of a domestic corporation not traded through the local stock exchange; and
• real property held as capital assets.

NOTE: Net Capital Loss Carry Over (NCLO) under Sec. 39 (D) of NIRC⁷ is different from Net Operating Loss Carry Over (NOLCO) under Sec. 34 (D) of NIRC⁸.