PHILIPPINE WOMEN’S UNIVERSITY

CDCEC-TARLAC
FIRST WEEK MODULE
2ND SEMESTER AY 2019-2020
INCOME TAXATION

I. PRETEST

Without looking at your notes, kindly answer the following questions:

1. Is a capital gain similar to an ordinary income?

2. What are the distinctions between ordinary assets and capital assets?

II. LECTURE

Objectives:

At the end of this module, the students are expected to:

a. Understand the nature of capital gain and loss;
b. Differentiate ordinary income from capital gain;
c. Identify ordinary assets and capital assets; and
d. Know how to compute income tax from dealings in property.

Lecture Proper:

Aside from income derived from work or profession, income can be generated from
dealings in property.

Dealings in property such as sales or exchanges may result in gain or loss.

The kind of property involved (i.e., whether the property is a capital asset or an
ordinary asset) determines the tax implication and income tax treatment, as follows:

Taxable Net Income = Ordinary Net Income + Net Capital Gains (other than those
subject to final CGT)

What is a capital gain?

 An income derived from sale of assets not used in trade or business.
 Examples are sale of family home and other capital assets.

What are the types of property?

 Ordinary Assets
 Capital Assets

What are ordinary assets?

 Stock in trade of the taxpayer/ 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.
 Property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business. Property used in the trade or business of a
character which is subject to the allowance for depreciation, or Real property
used in the trade or business of the taxpayer, including property held for rent.

Page 1 of 4
 PHILIPPINE WOMEN’S UNIVERSITY
CDCEC-TARLAC
FIRST WEEK MODULE
2ND SEMESTER AY 2019-2020
INCOME TAXATION

What are capital assets?

 Property held by the taxpayer, whether or not connected with his trade or
business which is not an ordinary asset.
 Generally, they include: stocks and securities held by taxpayers other than
dealers in securities real property not used in trade or business, such as
residential house and lot, idle or vacant land or building investment property,
such as interest in a partnership, stock investment Personal or nonbusiness
properties, such as family car, home appliances, jewelry.

If the asset involved is classified as ordinary, the entire amount of the gain from the
transaction shall be included in the computation of gross income and the entire amount
of the loss shall be deductible from gross income.

If the asset involved is a capital asset, the rules on capital gains and losses apply in the
determination of the amount to be included in gross income

These rules do not apply to:

 real property with a capital gains tax (final tax), or
 shares of stock of a domestic corporation with a capital gains tax (final tax).

Also, sale of shares of stock of a domestic corporation, held as capital assets, through
the stock exchange by either individual or corporate taxpayers, is subject to 0.6 of 1%7
percentage tax based on gross selling price.

The following percentages of the gain or loss recognized upon the sale or exchange of
a capital asset shall be taken into account in computing net capital gain, net capital
loss, and net income:
1. If the taxpayer is an individual –
• 100% if the capital asset has been held for not more than 12 months;
and
• 50% of the capital asset has been held for more than 12 months
2. If the taxpayer is a corporation –
• 100%, regardless of the holding period of the capital asset [Sec. 39(B),
NIRC]

The tax rules for the gains or losses from sales or exchanges of capital assets over
ordinary assets are as follows:
1. Net capital gain is added to ordinary gain but net capital loss is not deductible
from ordinary gain.
2. Net ordinary loss is deductible from ordinary gain.
3. Capital losses are deductible only to the extent of the capital gain.
4. There is a net capital loss carry-over on the net capital asset’s loss in a taxable
year which may be deducted as a short-term capital loss from the net capital
gain of the subsequent taxable year; provided that the following conditions shall
be observed:
a. The taxpayer is other than a corporation;
b. The amount of loss does not exceed the income before exemptions at the
year when the loss was sustained; and
c. The holding period should not exceed 12 months.

Page 2 of 4
 PHILIPPINE WOMEN’S UNIVERSITY
CDCEC-TARLAC
FIRST WEEK MODULE
2ND SEMESTER AY 2019-2020
INCOME TAXATION

Computation of the amount of gain or loss:

Amount realized from sale or other disposition of property

Less: Basis or Adjusted Basis
----------------------------------------------------------------------
NET GAIN or LOSS

Note: Amount realized from sale or other disposition of property = sum of money
received + fair market value of the property (other than money) received. Note: When
a taxpayer sells a real or personal property, he should deduct its cost from its selling
price to measure the gain or loss from the sales transaction [Sec. 40, NIRC].

Example:

1. Pedro sold his mansion in Ayala, Alabang. The selling price was P150,500,000.00 and
cost was P88,400,000.00.

Again, this is the formula:

Amount realized from sale or other disposition of property

Less: Basis or Adjusted Basis
----------------------------------------------------------------------
NET GAIN or LOSS

Applying the above formula:

P150,500,000.00
Less: P88,400,000.00
----------------------------------------------------------------------
P62,100,000.00 (NET GAIN)

2. An individual, who is a real estate dealer, sold a residential lot in Quezon City. The
selling price was P4,800,000.00 and cost was P5,480,000.00.

Applying the above formula:

P4,800,000.00
Less: P5,480,000.00
----------------------------------------------------------------------
-P680,000.00 (NET LOSS)

Page 3 of 4
 PHILIPPINE WOMEN’S UNIVERSITY
CDCEC-TARLAC
FIRST WEEK MODULE
2ND SEMESTER AY 2019-2020
INCOME TAXATION

III. EXERCISE

Compute the Net Gain or Loss. Also, identify if it is a Gain or a Loss.

Due to recession, Alma ceased the operations of her business and sold the following
properties:

1. Office space located at Bonifacio Global city with selling price of P15,3000,000.00.
Two years ago, she bought it at the price of P9,050,000.00. The renovation costed
P1,450,000.

2. 5 Toyota Innovas, the price of P950,000.00 each. She bought them at the price of
P1,500,000.00 each.

IV. POST EVALUATION

Give three different examples of capital assets, provide necessary amount or variable
and compute for the net gain or loss.

Note: Do not copy the examples or exercises provided in this module.

Prepared By: Noted: Approved:

ROSEL JOY A. PROVIDO DR. MARK ANTHONY R. CASEM DR. LUISITO G. DE JESUS
Instructor Dean of Studies School Administrator

Page 4 of 4