INCOME TAXATION

9 Gains and Losses from Dealings in Property

Learning Objectives:

After studying this chapter, you should be able to:

4 ldentify the basis of measuring gains and losses.
State the procedures in determining the cost basis of property disposed.
a Distinguish between capital assets and ordinary assets.
A Detail the guidelines in determining whether an asset is capital or ordinary
asset.
5. Explain the rules on the recognition of capital gains and losses for individuals
and corporations.
6. Compute the capital gains tax on disposition of real property.
7. Discuss the procedures on sale of real property classified as principal residence.
8. Describe the mechanics in computing capital gains tax paid on installment
method.
9. Comnpute the capital gainstax on stock transactions.
10. List the persons exempt from capital gains tax.

GAINS ANDLOSSES ON SALE OR EXCHANGE OF PROPERTY

Gains and losses may arise from disposition of real and personal property for money, in
the entire
dse of a sale, or for property, in case of an exchange. As a general rule,
loss is
dnount of gain or loss shall be recognized such that again is taxable while a
deductible.
Gain or Loss in aSale
the
woin or loss from sale of property is the difference between the selling price of
property and its cost computed as follows:
XXX
Selling price XXX
Less:Cost
XXX
Gain (Loss)

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 Expenses of disposition such as agent's commission and other selling
reductions from the selling price. expenses are

Gain or Loss in an Exchange

Gain or loss from exchange of property isthe difference between the fair
of the property received and the cost of the property given in exchange.Thus,market value
Fair market value of the property
received in exchange XXX
Less: Cost or basis of property
Given in exchange XXX

Gain (Loss) from the exchange XXX

For an exchange to transpire, it is not necessary that the property received is essentially
different from the property disposed of. It is sufficient that the property received has a
fair market value for gain or loss to be recognized.
Basis of Property Disposed of
In the preceding pro-forma computations of gain or loss, the basis of the property
disposed of is the cost at which the taxpayer acquired the property. Primarily, this basis
would depend on the manner in which the taxpayer acquired the property:
1 If the property was acquired by purchase, basis is cost (purchase price plus expenses related
to acquisition). This cost may later be increased by capital expenditures.
2. If the property is included in the taxpayer's inventory, basis is the latest inventoryvalue.
3. If the property was acquired by devise, bequest or inheritance, basis is the fair market value
as of the date of acquisition.
4. If the property was acquired by gift, basis is the value as it would be in the hands of the
donor or the last preceding owner by whom it was not acquired by gift, except that if such
basis is greater than the fair market value of the property at the time of gift, the basis Siam
be such fair market value, for purposes of determining the loss.
5. If the property was acquired for less than an adequate consideration in money or in money
the basis is the amount paid by the transferee for the property or the transferor's
asis.

value of the property cannot be convincingly shown by the taxpayer, then

ng price shall be considered the gain.

CAPITAL GAINS AND LOSSES ON SALE OR EXCHANGE OF PROPERTY

Of vital importance when disposing of a property is to nature of the
determine the losses
property, i.e., a capital asset or an ordinary asset. This is so and
because gains
292

p4 2
 that do
from
sales exchanges of capital assets are given preferential tax treatment
or
applyto gains or losses from sales or exchanges of ordinary assets.
not
ordinary Gain Vs. Ordinary Loss, Capital Gain Vs. Capital Loss
assets. It
ordinary gain is the gain derived from the sale or exchange of ordinary performance of
includes all gains other than capital gains such as those derived from the Ordinary
services, whether personal or professional, and those accruing from business.
Sis the excess of expenses and losses over the income of the taxpayer excluan
capital gains
and capital losses; or the loss incurred from the sale or exchange of an
ordinary asset.

Capital loss
Capital gain is the gain derived from the sale or exchange of capital assets.
incurred from the sale or exchange of capital assets. Net capital gain is the
is the loSs from such
excess of the gains from sales or exchanges of capital assets over the losses
sales or exchanges. Net capital loss is the excess of the losses from sales or exchanges of
canital assets over the gains from such sales or exchanges.

Capital Asset vs. Ordinary Asset

Revenue Regulations 7-2003 provides the guidelines in determining whether a property

is a 'capital asset' or an 'ordinary asset' for purposes of imposing either of the following
income taxes:

capital gains tax;

ordinary income tax; or
minimum corporate income tax (MCIT)

Definition of Terms
Capital Assets - shall refer to all real properties held by a taxpayer, whether or not connected
considered as
With his trade or business, and which are not included among the real properties
ordinary assets under Section 39(A)(1) of the Code.
of
Ordinary Assets shall refer to all real properties specifically excluded from the definition
apital assets under Section 39(A)(1)of the Code, namely:
be
d Stock in trade of a taxpaver or other real property of a kind which would properly
the taxable vear: or
Included in the inventoryof the taxpayer if on hand at the close of
the ordinary course of
Keal property held bythe taxpayer primarily for sale to customers in
his trade or business; or
3. Real property used in trade or business (i.e. buildings and/or improvements) of a character
34(E) Of th
Which is subiect to the allowance for depreciation provided ror under Section
4. Code; or
Real prroperty used in trade or business of the taxpayer.

293
Real properties acquired by banks through foreclosure sales are considered as their ordinary
assets. However, banks shal not be considered as habitually engaged in the real estate business
for purposes of determining the applicable rate of withholding tax imposed under Section
2.57.2(0) of Revenue Regulations 2-1998, as amended.
Real Property - shall have the same meaning attributed to that term under Article 415 of
Republic Act 386, otherwise known as the Civil Code of the Philippines.
Real Estate Dealer - shall refer 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 fullor
part-time dealer in real estate.
Real EstateDeveloper - shall refer to any person engaged in the business of developing real
properties intosubdivisions, 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.

Real Estate Lessor - shallrefer to any person engaged in the business of leasing or renting real
properties on his own account as a principal and holding himnself out as lessor of real properties
being rented out or offered for rent.
Taxpayers engaged in the real estate business - shall refer collectively to real estate dealers.
real estate developers, and/or real estate lessors. Conversely, the term (taxpayers not engaged in
the real estate business' shall refer to persons other than 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 its primary purpose is to engage in the
real estate business shall be deemed to be engaged in the real estate business for purposes of
these Regulations.

Guidelines in Determining Whether Capital or Ordinary Asset

The matrix below has been developed for you. It contains the guidelines in determining
whetherareal property is a capitalasset or an ordinary asset.
Ordinary Asset Capital Asset
1a. Taxpayers engaged in the real
estate business
" Real estate dealer All real properties acquired

" Real estate developer All real properties

acquired (developed or
undeveloped);
- held primarily for sale or for
lease;
-which would properly be included
in the inventory of the taxpayer if
on hand at the close of the
taxable year;
used in the trade or business
(land, building or other
Real estate lessor improvements).

All real properties (land and/or

294
 improvements)
-For lease/rent or being offered
for lease/rent;
For use or being used in the trade
Those habitually engaged in or business.
the real estate business
All real properties acquired in the
course of trade or business
b Taxpayer not engaged in the real Real properties (land, building or
estate business Real property used by an
other improvements) used, being exempt corporation in
used or have been previously used its exempt operations
in the trade or
business of the (not considered used for
Taxpayer who changed business taxpayer business purposes)
2
from real estate business to non
Shall not result in the re
real estate business; or who classification of real property held
amended the Articles of
from ordinary asset to capital asset
Incorporation as to primary
purpose
3. Taxpayer originally registered to All real
be engaged in the real estate properties originally
business but failed to
acquired shall continue to be
treated as ordinary assets.
subsequently operate
4 Treatment of abandoned and idle
Real property initially acquired bya
real properties Iftaxpayer is engaged in
taxpayer engaged in the real estate business other than real
business shall not result in its estate business, ordinary
conversion into acapital asset even asset is converted to
if the same is
subsequently
abandoned or becomes idle. capitalasset upon proof
that it has not been used
in business for more
than 2 years prior to the
consummation of the
5. Treatment of real properties taxable transaction.
Heir, donee or
transferred through stockholder
Succession or donation to heir
or donee - is not engaged in the
" received as dividend by real estate business,
and
stockholder - does not
use such subsequently
property in
trade or business
The real property received in an
transferred in a tax-free exchange shall be treated as
exchange where transferor is ordinary asset in the hands of the
not engaged in real estate transferee
business who is engaged in real estate
business, or
- who, even if not engaged in real
estate business, willuse the same
in business.

Treatment of real property Noeffect on the classification of such real

Subject of involuntary transfer hands of the involuntary seller, either as property in the
capital or ordinary
(inciuding expropriation or asset, as the case may be
foreciosure sale)
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 Applicable Taxes on Sale, Exchange or
Other Disposition of Real Property
Gains/income derived from sale, exchange or other disposition of real properties shall,
unless otherwise exempt, be subject to applicable taxes imposed under the Code,
depending on whether the subject properties are classified as capital assets or ordinary
assets.

Location of Capital asset Ordinary asset

Taxpayer Basis
Property
1 INDIVIDUALS
Within Gross selling price or 6% CGT Ordinary income tax
Engaged in trade or
business in the Phil. current fair market (FWT) computed using the
value as prescribed by graduated tax rates
" Citizens
the Commissioner (Sec. (Sec. 24(A)(1)(c) or
" Aliens 6(E)), whichever is 25(A)(1))
Estates and trusts higher
included
Note: If the buyer is the Government
or any of its political subdivisions,
agencies or a GOCC, seller may
choose between the 6% CGT or the
graduated tax rates.

Not engaged in trade or Within -same 6% CGT

business in the Phil. (FWT)
" Nonresident aliens
2 CORPORATIONS
" Domestic Within -same 6% CGT Either:
(FWT) Ordinary income tax
(Sec. 27(A)); or
-MCIT (Sec. 27(E)),
whichever applies

Resident foreign Within -Same Regardless of classification, the sale

is subject to either:
- Ordinary income tax (Sec. 28(A)\1));

- MCIT (Sec. 28(A)(2)),

whichever applies.

" Nonresident foreign Within -same 35% final withholding tax (Sec.
28(B)(1))

3
Regardless of classification,
" Resident citizen Without -same Ordinary income tax (Sec. 24(A)\(1))
" Domesticcorp. Ordinary income tax (Sec. 27(A))
" Nonresident citizen Exempt (Sec. 23(B)
" Alien Exempt (Sec. 23(D))
" Foreign corp. Exempt (Sec. 23(F))

296
Kinds of Capital Asset as to Holding Period
Holding period is the duration for which the taxpayer held the capital asset.
1. Short-term. One which has been held by the taxpaver for 12 months or less; and
2. Long-term. One which has been held by the taxpayer for more than 12 months.

Rules on the Recognition of Capital Gains and Losses

Individuals

Where the taxpayer is an individual, the following rules as to recognition of capital gains
or losses from the disposition of personal property classified as capital asset shall apply:
1. Depending on the holding period, the percentages of gain or loss to be taken into account
folows:

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.

2. Capital losses are deductible only to the extent of the capital gains; hence, a net capital loss
is not deductible.

3. Ordinary losses are deductible from capital gains but net capital loss cannot be deducted
from ordinary gain; and
4 "Net capital loss carry over" is recognized on the following conditions:
Net capital loss in a taxable year does not exceed the net income before exemptions for
Such year.
Such net capital loss may be deducted from the net capital gains of the next taxable
year.

llustration: Sophia, an individual taxpayer, had the following income and losses for
calendar years 2013 and 2014:

2013
Ordinary taxable income P30,000
Short-term capital gain 12,000
Short-term capital loss 27,000

2014
P36,000
Ordinary taxable income
48,000
Long-term capitalgain

297
 The taxable income of Sophia, before personal and additional exemptions for
is computed as follows: two years,
2013

Ordinary taxable income P30,000

Capital asset transactions:
Short-term capital gain (at 100%) P12,000
Less: Short-term capital loss (at 100%) 27,000
Net short-term capital gain (loss) (P15,000)
Taxable income (before exemptions) P30,000

Note that the net capital loss is not deductible.

2014

Ordinary taxable income P36,000

Capital asset transactions:
Long-term capital gain (P48,000 x 50%) P24,000
Less: Net capital loss carried over from 2013 15,000
Net capital gain 9,000
Taxable income (before exemptions) P45,000

Assuming that the ordinary taxable income of Sophia in 2013 is P12,000, the entire net
capital loss of P15,000 in that year cannot be carried over in 2014-only to the extent of
P12,000-the taxable income for 2013. The taxable income for 2014 will then be
P48,000 [P36,000 + (P24,000 - P12,000)]. The balance in the net capital loss of P3,000
(P15,000 - 12,000 recognized in 2014) cannot be carried over in any succeeding year.
The law allows the carry-over of net capital loss only once.
2013

Ordinary taxable income P12,000

Capital assets transactions:
Short-term capítal gain (at 100%) P12,000
Less: Short-term capítal loss (at 100%) 27,000
Net short-term capital gain (loss) (P15,000)
Taxable incorne (before exemptions) P12,000
2014

Ordinary taxable income P36,000

Capital assets transactions:
Long-term capital gain (P48,000 x 50%) P24,000
Less: fNet capital foss carried over from 2013 12,000
Net capital gain
12,000
Taxable incorne (before exemptions) P48,000

298
Corporations

Wherethe taxpayer is a corporation, the following rules as to recognition of capital

gains or losses from the disposition of property lassified as capital asset shall apply:
The holding period does not apply to corporations. Hence, capital gains and losses are
recognized 100%;

, Capital losses are deductible only to the extent of capital gains;

: Ordinary losses are deductible from capital gains but net capital loss cannot be deducted
from ordinary gain; and

Net capital loss carry-over is not applicable.

lustration: A domestic corporation has the following data on its operations for the
current year.

Capital gains from sale of capital assets held:

10 months P45,000
14 months 75,000

Capital losses from sales of capital assets held:

12 months P30,000
18 months 60,000

in the preceding year, it had anet capital loss of P15,000. The computation of the net
taxable income for the current year follows:

Ordinary net income P300,000

Add: Capital gains (at 100%) P45,000
75,000 P120,000
Less: Capital losses (at 100%) P30,000
60,000 90,000
Net capital gains 30,000
Taxable income P330,000

The net capital loss of P15,000 cannot be carried over. If the capital gains amount to
*S0,000 and the capital losses P120,000, the net income subject to tax is P300,000.

iransactions Deemed Sale or Exchange

The following are considered sales or exchanges of capital assets hence the rules on
Cepital gains and losses apply:
1 Retirement of bonds. Amounts received by the holder upon the retirement of bonds,
debentures, notes, or certificates or other evidences of indebtedness issued by any
Corporation (including those issued by the government or political subdivision thereof) with

299
 the interest coupons or in registered form, shall be considered as amounts received in

exchange therefor .
sales shall be considered as
property. Gains or losses from such
2 Short saes of
gains or losses from sales or exchanges of capital assets. (short-term
the seller sells securities, which he does not own, and, therefore, he cs
insupply thesale,
ashort securities if he anticipates a decline in their price. He must therefore wait until
the price of the securities should lower so that he can make profit. Othervwise. he incurs a
loss.

3. Failure to exercise privilege or option to buy or sell property. Gains or losses attributable to
such failure shall be considered as capital gains and losses.
4. Securities becoming worthless. If securities, which are capital assets, are ascertained toh
worthless and written off during the taxable year, the loss resulting therefrom in the case nf
a taxpayer other than a bank or trust company incorporated under the laws of the
Philippines, a substantial part of whose business is the receipt of deposits, is considered a
capitalloss.
5 Distributions in liquidation of a corporation. In allcases where a corporation distributes all
of its properties or assets in complete liquidation or dissolution, the gain realized or loss
sustained from the transaction by the stockholder, whether individual or corporate, is
taxable or deductibile, as the case may be, in the percentages recognized by the Code. Such
distributions are treated, in effect, as asale of the stock. The gain or loss is measured by the
difference between the liquidating dividend received and cost or other basis to the taxpayer
of his holding in the corporation.
6 Readjustment of interest in a general professional partnership. An example of this is when
a partner retires from the partnership.

CAPITAL GAINS TAX ON DISPOSITION OF REAL PROPERTY

Sales, exchanges or other dispositions of real property classified as capital assets,

including pacto de retro sales and other forms of conditional sale, by individuals,
inciuding estates and trusts, shall be taxed at the rate of 6% based on the gross sellins
price or current fair market value as determined by the Commissioner, whichever b
higher.

in the case of a domestic corporation, the capital gains tax is imposed wher
transaction involves
are not actually used the sale,corporate
in the exchange,business
or disposition of landsasand/or
and are treated capital building whe6%
assets. The
gains tax on the sale of acapital asset is a final tax and is imposed on each income
sale
disposition. Thus, the corporation-seller of the property need not report the
from the sale when it files its annual income tax return for the year concerned.

be any
The amount realized from the sale or other disposition of real property shall money)
money received plus the fair market value of the property (if other than formn
received by the taxpayer seller. Interest included in installment payments shall not

300
 taxable under
the amount realized but shall be treated as ordinary income
of
nart
24 ofthe
Code.
Section
disposition of
on its
No7-stock, non-profit organizations are subject to capital gains tax 2012).
property(BIR Ruling 23-2010, Aug. 4, 2010; RMC 7-2012, Feb. 23,
eal
TaxBase

fair market value as

value of the real property
will be based on the selling price, the
The value) or the fair market value as shown in
determined by the Commissioner (2onal
Assessor, whichever is higher. If there is no
Provincial or City sales
schedule of values of the gross selling price per
value. the taxable base is whichever is higher of the
declaration.
zonal
documents or the fair market value
that appears in the latest tax
per
value of improvement is the construction cost
improvement, the construction,
# there is an plus 10% per year, after year of
permit
huilding permit and or ocCupancydeclaration.
latest tax
or the market value per
the selling price per Sheriff's Certificate of Sale
sale, tax base is fair
in the case of foreclosure In a taxable exchange, the taxable base is the
Contract to Sell.
or the bid price in the
exchanged.
market value of the property
or
management company through auction sale
by an asset not on
The sale of real properties based on the highest or winning bid price, and
CWT Dec.
public bidding is subject to properties (BIR Ruling DA (C-331) 807-2009,
of the real
the higher zonal valuation
22, 2009).
without first
change the zonal valuation of properties
Ihe CIR Cannot
unilaterally
consultation with competent appraisers, both from
of (CIR Vs.
Complying with the requirement provided in Section 6(E) of the Tax Code
the private and public
sectors, as Oct. 20, 2010).
(Second Division) G.R. 170389,
Supreme Court
Aquofresh Seafoods, Inc.,

liustrations: sold at P 1,500 per square

1,000 square meters was
lot with an area
of determnined by the
1. Aresidential
the fair market value (Zonal Value) as
meter. At the time of sale P2,000 per square
meter while the assessed value per
BIR was 800,000.
Commissioner of the per square meter or P
the said lot was P800
Tatest tax deciaration of P1,500,000
Selfling Price (1,000 x P1,500)
(Zonal Value) 2,000,000
Fair Market Value 800,000
(1,000 x P2,000) Declaration)
Value (Per Tax
Fair Market
taxable base of the said lot is P2,000,000.
purposes, the
ror Capital Gains Tax

301
 2. Assume that in no. 1 above, there was no zonal valuation established by he
Commissioner.
Selling Price (1,000 xP1,500) P1,500,000
Fair MV (Assessed Value Per Tax Declaration) 800,000

For Capital Gains Tax purposes, the taxable base of the said lot is P1,500,000.
Tax Rate and Tax Due

The rate of capital gains tax for disposition of real property is 6%.
llustration: Ms. Mendoza, a resident citizen,sold her residential house and lot located
in the Philippines for P6,000,000. Three years ago, she bought the house for
P4,000,000. It now has a fair market value of P5,500,000. How much is the capital gains
tax?

Selling price (higher than FMV) P6,000,000

Multiply by 6%
Tax due P 360,000

The capital gains shall not be included in the gross income for purposes of computing
the taxpayer-seller income tax liability under Sections 24(A) and 27(A). However, an
individual taxpayer may elect to declare gains realized from asale or disposition of real
property to the government (or any of its political subdivisions or agencies or to
government-owned or controlled corporations) under Section 24(A) of the Code.

If the real property sold by the individual taxpayer is an ordinary asset, the entire gain is
taxable under Section 24(A). If it is personal property and a capital asset, 50% or 100%
of the gain, depending on the holding period, is taxable under Section 24(A). If it is
personal property and an ordinary asset, the entire gain is taxable under Section 24(A).
In all these cases, the sale or disposition shall be subject to withholding prescribed
under Revenue Regulations 2-1998, as amended.

Persons Subject to Capital Gains Tax

1. Individuals
2. Domestic corporations

The transfer of title by the trustee in favor of the trustor, who is the beneficial owner
thereof, is not subject to CGT under Section 27(D)(5)of the Tax Code, or to CWT under
R.R. 2-98, as amended, because the conveyance is not motivated by valuable
consideration and merely acknowledges, confirms and consolidates the legal title and
beneficial ownership over the property in the name of the trustor (BIR Ruling 329-2014,
May 11, 2012).

302
NAME:
SECTION: SCORE:
PROFESSOR:
TrueorFalse

fthe cost or Vaiue or the

property cannot be
fair market value shall be
consideredthe gain. convincingly shown by the taxpayer, then tne
2 When disposing OT aproperty, the nature of
asset, does not matter the same, i.e. a capital asset or an
because capital and ordinary assets are given ordinary
the same tax treatment.
) Net capital gain is the excess of the gains from
losses from such sales or exchanges while net sales or exchanges of capital assets over the
sales or exchanges of capital assets over the capital loss is the excess of the losses trorm
gains from such sales or exchanges.
A Ordinary gain includes capital gains such as those derived from the
whether personalor professional, and those accruing from performance of services,
business.
5 An individual taxpayer may elect to
declare gains realized from a sale or disposition of real
property to the government under Section 24(A) of the Code.
6. Capital assets include all properties held by
the taxpayer whether or not connected in trade
or business including those
enumerated ordinary assets.
as
7. The net capital gains realized on stock
transactions shall be included in the gross income of
the seller in computing his normal income tax liability.

8. As a general rule, the entire amount of gain or loss

arising from sale or exchange of real or
personal property shall be recognized such that a gain is taxable while a loss is deductible.
9. An individual is qualified to account for his gain on
installment basis if the initial payment
exceeds 25% of the selling price.
iU. Stocks held by dealers in securities are classified as capital
assets.
i. Expenses of disposition such as agent's commission and other selling
to the selling price.
expenses are additions

. Capital gains realized during each taxable year by individuals or corporations from sale.
exchange or disposition of shares of stock in any domestic corporation not traded through a
local stock exchange are subject to final tax of 5% for the first P100,000, and 10% for amount
In excess of
P100,000.
13. The
final capital gains tax shall be composed on the basis of the entire amount of gain
alized from the sale or disposition of shares of stock and the tax so computed shall be paid
one time.

317
14. A final consolidated return or an
adjustment return covering all the
the last quarter of the taxable year stock transactions to.
shall be iled on or betore April 13 of the folloine
taxable year.
15. Sales, exchanges or other dispositions of real property classified as
capital aSsets, including
pacto de retro sales and otther forms of conditional sale, by individuals,
trusts, are taxed at 6% based on the groSs selling price or current fair including estates ane
market value as
determined by the Commissioner, whicheveris higher.
16. Sale, exchange, or disposition of lands and/or building by domestic
not actually used in the corporate business and are treated as capitalcorporations which are
assets is subject to 6%
capital gains tax.
17. Ordinary loOSs is the excess of expenses and losses over the income of the taxpayer
capitalgains and capital losses, or the loss incurred from the sale or exchange of anexcluding
ordinay
asset.

18 The Revenue District Officer (RDO) of the revenue district where the
property being
transferred is located issues the corresponding Tax Clearance (TCL) or Certificate Authorizing
Registration (CAR) of the real property in favor of the transferee.
19. Holding period is the duration for which the taxpayer held the capital asset.
20. Interest included in installment payments shall not form part of the amount realized and
shall not be treated as ordinary income taxable under Section 24 of the Code.

21. The Register of Deeds is prohibited from registering any document

unless the Commissioner of Internal Revenue or his duly authorized
transferring real property
representative has
certified that such transfer has been reported and the tax imposed, if any, has been paid.
22. When a natural person disposes of his principal residence, he is exempt from the payment of
the capital gains tax due on the sale if the proceeds from the sale or
disposition of the
principal residence are fully utilized in acquiring or constructing a new principal
within 18 months from the date of the sale or disposition. residence

23. Capital gain is the gain derived from the sale or exchange of capital assets while
is the loss incurred from the sale or exchange of capital loss
capital assets.
24. In no case shall capital gains tax on stock transaction be
allowed as deduction against
income or credited against income tax or any other taxes.

25. Initial payment means the payment which the seller receives before or
the instrument of sale plus other payments which he expects or is upon execution ol
cash or property during the taxable year of sale or disposition. scheduled to receive "

26. if the property sold is subject to a mortgage which is

mortgage exceeds the basis of the property sold, the excess assumed by the buyer, and
shall form part of the initia
payments in which case, the contract price is equal to selling price less
plus the excess of the mortgage over the basis of the mortgage assunie
property sold.

318
NAME: SCORE:
SECTION:
PROFESSOR:
Multiple Choice-Theory
1 An individual taxpayer owns a ten (10)-door apartment with a monthly rerntal
P10,000 each residential unit. He sold this property to another individual taxpayer.
Which is false?
a The property sold is a capital asset.
b. The seller is not liable to pay the capital gains tax.
C. The taxpayer is engaged in the real estate business.
d. The taxpayer is regularly renting out the apartment.
2. On capitalgain tax on real property, which of the following statements is not true?
The tax may be paid in installment if the initial payments do not exceed 25% of
the selling price.
b. The installment payment of the tax should be made within 30 days from receipt
of each installment payment on the selling price.
C. The tax should be paid, if in one lump sum, within 30 days from the date of sale.
d. The term "initial payment" issynonymous to "down payment."
3. Afeature of ordinary gains as distinguished from capital gains
No holding period
b. Sources are capital assets
C. May or may not be taxable in full
d. Gains from sales of assets not included as inventory
4. Under Section 34(b) of the Tax Code, how much shall be taken into account in
computing the net income, if a gain is realized by an individual taxpayer from the
sale or exchange of capital assets (other than real properties and shares of stocks)
held for more than twelve months?
a P 5,000
b. P50,000
C. 5% of the capital asset sold
d. 50% of the net capital gain
S. Holding period is the duration for which the taxpayer held the capital asset. A
capital asset held bythe taxpayer for more than 12 months is said to be
no-term.
b short-term.
medium-term.
d. long-term.
D Mr. Juan dela Cruz transferred his commercial land with a cost of PS00,000 but with
the
afair market value of P750,000 to JDC Corporation in exchange of the stock of

319
 corporation with par value of P1,000,000. Hence, he became the major stockholde.
of the corporation. As a result of the transfer,
the recognized gain is the difference between the fair market value of
shares of stocks and the cost of the land.
b. no recognized gain because the land was in exchange of purely stocks and Mr
Dela Cruzbecame the majority stockholder.
c. the recognized gain is the difference between the par value of the stocks and
the fair market value of the land.
d. no recognized gain because the land was in exchange of stocks of the
corporation.

7. Losses on sale or disposition of stocks traded through the local stock exchange and
held as capital assets, to be deductible must conform with which of the following
rules?

Net capital loss for a quarter is deductible in the same taxable year only.
b. Capital losses when the transaction is deemed a wash sale are not deductible.
There is no holding period hence the entire amount of capital gains and losses
are considered.
d. Allof the above
8. Which is true when a natural person disposes of his principal residence?
a. The seller is exempt from the payment of the capital gains tax if the proceeds
from the sale are fully utilized in acquiring a newprincipal residence within 18
months from the date of disposition.
b. The basis of the seller's new principal residence shall be the basis of her old
principal residence if the proceeds are fully utilized in constructing a new
principal residence within 18 months from the date of the sale.
C. If there is no ful utilization, the portion of the gain presumed to have been
realized shall be subject to capital gains tax.
d. if there is no utilization at all, the full capital gains tax is imposed.
e All of the above

9 Where the taxpayer is a corporation, the following rules as to recognition of capital

gains or losses from the disposition of propertyclassified as capital asset shall apply.
Which does not?
Net capital loss carry-over is not applicable.
b. Capital losses are deductible only to the extent of capital gains.
C. The holding period does not apply to corporations, hence, capital gains ae
losses are recognized 100%.
d. Ordinary losses are deductible from capital gains but net capital loss cannot be
deducted from ordinary gain.
None of the above

320
 disposition of
the is an
The slowing rules as to recognition of capital gains or losses from taxpayer
10. personal property classified as capital asset apply where the
individual. Which does not? the
Capitallosses are deductible only to the extent of the capital
gains; hence,
a. net capital loss is not deductible.
cannot be
capital loss
Ordinary losses are deductible from capital gains but net
b deducted from ordinary gain,.
net incomne before
Net capital loss in a taxable year does not exceed the
C
exemptions for such year. if the
or loss is 100%
pepending on the holding period, the percentages and
of gain
50% if the capital asset
capital asset has been held for 12 months or less;
has been held for more than 12 months.
e
None of the above

Which of the following is considered asale or exchange of capital assets?

11.
a.
Short sales of property
b. Securities becoming worthless
Retirement of bonds
C.
d Failure to exercise privilege or option to buy or sell property
e.
Allof the above
classified as
12. Lots being rented when subsequently sold are
a. liquid assets.
b. fixed assets.
C. capital assets.
d. ordinary assets.
basis of property disposed of?
13. Which is not true with regard to the
taxpayer's inventory, basis is the latest
a. If the property is included in the
inventory value.
b. If the property was acquired by
purchase, basis is cost or purchase price plus
expenses related to acquisition.
the property was acquired by devise, bequest or inheritance, basis is the fair
C. If
market value as of the date of acquisition.
adequate consideration in money
a. If the property was acquired for less than an paid by the transferee for the
or in money's worth, the basis is the
amount
property or the transferor's adjusted basis.
e. None of the above
14. The term "capital assets" includes
business of taxpayer.
realproperty not used in the trade or
the taxpayer's inventory.
O. stock in trade or other property included in course of his trade or
property primarily for sale to customers in the ordinary
business. used in the trade or business
d. property of the taxpayer and.subiect to

depreciation.
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NAME: SCORE:
SECTION: PROFESSOR:

Multiple Choice-Problems
In addition to his business as construction materials dealer, Mr. Albert
following capital assets transactions in 2013:
had the
Capital Sold Acquired Selling Capital
Asset Date Selling Date Cost Expenses Gain
Price
(Loss)
Jeweiry 3/15/2013 5/10/2009 P 10,000 P1,000
M. Benz Car 5/16/2013
P 80,000
400,000 7/15/2007 350,000 20,000 P69,000
Refrigerator 9/05/2013 6,000 2/09/2013 5,000 30,000
Voiks Car 1/10/2013 500
1,000
12/05/2013 12,000 (8,500)
1. The net capital gain of Mr. F in 2013 is
a. P27,000 b. P76,500 C. P42,000 d. P26,500

Mr. Aaron E., a citizenand resident of the Philippines, sold to John F. on July 1, 2013 a
piece of land held as capital asset in the Phils. at a selling price of P5,000,000. The land
had a cost of P2,500,000 and at the time of the sale had a fair market value of
P6,000,000 and amortgage of P2,000,000 which was assumed by Mr. F.
The sale called for a payment of P300,000 on the date of sale and P200,000 on Dec. 1,
2013. The balance shall be paid in installments of P500,000 each on Dec. 1, 2014, Dec.
1, 2015, Dec. 1, 2016, Dec. 1, 2017 and Dec. 1, 2018. Mr. Ewill pay the tax on the
transaction in installments, if qualified.
2. The initial payments was
a. P300,000 b. PS00,000 C. P700,000 d. None of the above

3 The contract price was

a. P3,000,000 b. P2,000,000 C. P2,500,000 d. None of the above

4. The tax paid on the payment received on July 1, 2013 was

P20,000 b. P50,000 C. P30,000 d. P36,000

Assurne the following data of Nika H., the taxpayer, for taxable year 2014:
Selling price of land in the Philippines held as capital asset P1,700,000
Fair market value of the land at the time of sale 2,000,000
Cost of the land
800,000
Payments on the selling price:
Assumption by the buyer of a mortgage on the property 900,000
Cash in the year of sale
Cash in the succeeding year 300,000
500,000
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 5 The capital gain tax in the year of sale is
a. P17,647
(installment, if qualified)
b. P53,333 d. P100,000
C. P44,444

in 2014, Danny de V., a citizen of the

sold his principal residence in the
philippines at a selling price equal to its Philippines
fair market value of P4,000,000. The basSIS o
cost of the property was P2,500,000.

6. If the entire proceeds of the sale is

principal residence, the capital gain tax isinmmediately invested in acquiring a new
a. P240,000 b. P200,000 C. PO d. Some other amount
7 How much is the basis of the
new principal residence?
a. PO b. P249,000 C. P2,500,000 d. Some other amount

8. If only P3,000,000 out of P4,000,000 was utilized in acquiring a new principal

residence, the capital gain tax is
a. P60,000 b. P240,000 c. P180,000 d. Some other amount

9. The basis of the new principal residence is

a. P2,500,000 b. P3,000,000 C. P1,875,000 d. Some other amount

Mr. Benjamin sold his residential house for P7 million in

2013. A year after, he acquired
a house and lot where he intends to reside for P4.5
the house that he sold for P2.5 million. It had a fair
million. Five years ago, he acquired
market value of P8 million at the
time of sale.

10. The capital gains tax on the sale is

a. P171,429 b. P420,000 c. P270,000 d. exempt

11. The adjusted cost basis of the new principal residence is

a. P2,500,000 b. P1,607,143 c. P892,857 d. P4,500,000

Mrs. Jemma C. owns a parcel of land worth P500,000 which she inherited from her
father in 2014 when it was worth P300,000, Her tather purchased it twelve years ago for
P100,000.
12. If Mrs. Jemma C. transfers this parcel of land to her wholly owned corporation in
Cxchange for shares of stock of said corporation worth P450,000, her taxable gain is
a. Zero b. P50,000 c. P150,000 d. P350,000

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 Assume the following data for the taxable year 2014 of Kevin S., a taxpayer
resident of the Philippines: single and a
Capital gain on sale of bonds held for 20 months P 100,000
Capital gain on sale directiy tobuyer of shares of domestic
corporation held for 6 months 240,000
Capital loss on sale of family car held for 11 months
Capital loss on sale of land in the Philippines held for 3 years
160,000
on a selling price of P1,600,000 120,000
Net capital loss in 2013 (net taxable income of the year was
P20,000) 40,000
13. Total capitalgains to consider at the end of the year is
a. P290,000 b. P50,000 C. P240,000 d. 260,000

14. The net capitalloss carry-over from 2013 is

a. P80,000 b. P110,000 C. PO d. P20,000

Beauty Corp., adomestic corporation has the following data for 2013, its first year of
operations:
Gross profit from sales P2,000,000
Dividend from domestic corporation 20,000
Capital gain on land in the Philippines held for
two years (sold at P1,000,000) 200,000
Capitalgain on shares of domesticcorporation
held for two months (direct sale to buyer) 120,000
Business expenses 1,100,000
Capital loss on bonds of domestic corporation
held for six months 30,000

15. The total capital gains taxes for the year is

a. P64,000 b. P54,000 C. P67,000 d. PO

16. The normal tax of the corporation at the end of the year is
a. P270,000 b. P315,000 C. P306,000 d. P900,000

Guide Corp., a domestic corporation, just concluded its taxable year 2013. It sold a piece
of land and building abroad held as capital asset at a selling price of P5,,000,000 with
payment in one lump sum.

17. The capital gain tax is

a. PO b. P250,000 the above
C. P300,000 d. Noneof

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 On different dates as listed below, Mr. Bening purchased common stock of ABC
Cornoration. On May 31, 2014, he received a 50% stock
Lot Date
dividend.
No. of Cost Per Total
No. Purchased Shares Share Cost
1 Oct. 15, 2013 400
2 Jan. 15, 2014 P100.00 P40,000,00
300 120.00 36,000.00
3 Mar. 15, 2014 200
May 15, 2014 140.00 28,000.00
100 150.00 15,000.00
Note: First-in first-out (FIFO) method assumes that the first
ones sold. stocks bought are the first

18. On June 30, 2014, Mr. Bening sold 1,400 shares at P100 per
first out method, the gain or (loss) of Mr. share. Using the first-in
Bening is
a. P31,000 b. (P26,600) C. P28,938 d. P21,000

In 2014, Truman Corp., a domestic corporation, sold the following shares of stock that it
held as capital assets:
Thru a local stock exchange:
Sale 1: Selling price of P300,000and cost of P280,000
Sale 2: Selling price of P600,000 and cost of P700,000

Directly to buyers:
Sale 3: Selling price of P300,000 and cost of P110,000
Sale 4: Selling price of P250,000 and cost of P200,000
Sale 5: Selling price of P320,000 and cost of P350,000

19. Total of capital gain taxes on a per transaction basis is

a. P33,000 b. P32,000 C. P24,000 d. P16,500

Thora B., ataxpayer, has the following data for taxable year 2014:
Capital stock issued and outstanding - Common only
Stock owned:
Acquisition No. 1: 100 shares acquired at P120 per share
Acquisition No. 2: 50shares acquired at P130 per share
Stock dividend received: (Acquisition No. 3) -20%
Shares sold directly to a buyer - 110shares at P110 per share

23. ifcosting is under the FIFO method, the capital gains tax is
b. P55 C. P160 d. P110
a. P118

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