Chapter 7

Dealings in Property
CONTINUATION.
Installment Reporting of Sale of Real Property
Ordinary Asset Real Property. In relation to withholding taxes on
installment sale of real property classified as ordinary asset, the
following rules shall be observed:
Buyer is an individual not engaged in trade or business, no
withholding is required to be made on the periodic instalment.
Buyer is engaged in trade or business, whether a corporation
or otherwise, the tax shall be deducted and withheld by the
buyer from every instalment based on the ratio of actual
collection of consideration against the agreed consideration
appearing in the Contract to Sell applied to the gross selling
price or fair market value of the property at the time of the
Contract to Sell, whichever is higher.
Sale of Real Property Not Located in the
Philippines
Income on sale of real property not Located in the
Philippines regardless of classification sold by a resident
citizen or domestic corporation be subjected to the normal
income tax rate using the schedular tax rates or 30%,
respectively.
Note: In general, only Filipino citizens and corporation or
partnership with as least 60% of the shares are owned by
Filipinos are entitled to own or acquire land in the Philippines.
Foreign individual corporation are not allowed to acquire
real property in the Philippines.
Illustration
During the year, X Manufacturing Corporation, domestic
corporation, made the following sales:
a) Real property located in the Philippines:
Investment property for speculation classified as capital
asset, acquisition cost of P500,000 sold for P3,000,000.
Land and Building used in business, acquisition cost of
P4,000,000 sold for P8,000,000.
b) Real Property located outside the Philippines with
acquisition cost of P2,000,000 sold for P5,000,000.
The corporation uses OSD if applicable.
Capital gain tax (P3,000,000x6%) P 180,000

Total sales(P8,000,000+P5,000,000) P 13,000,000

Less: Total cost of sales (P4,000,000+P2,000,000) 6,000,000
Gross Income P 7,000,000
Less: OSD (P7,000,000x40%) 2,800,000
Net taxable income P 4,200,000
Multiplied by normal tax rate 30%
Income tax due per ITR P 1,260,000
 Stock Transactions
These transaction refer to the sale of equity securities of other
corporations which are classified as either capital assets or
ordinary assets.

Stocks classified as capital assets are stocks and securities

held by the taxpayer other than dealers in securities. If sold,
these securities are subjected to capital gains tax (final tax).

Dealers in securities include all persons who for their own

account are engaged in the sale of stocks, bonds, exchange,
bullion, coined money, bank note, promissory notes, or other
securities as licensed by the SEC.
 For the purpose of determining the applicable tax on
stock market value, whichever is higher.

1. Dealers in securities are not liable to the stock transaction

tax of of 1% based on the selling price or fair market
value, whichever if higher.
The gain (loss) from sale of securities held by dealers in
securities are ordinary income (loss) subjected to
normal tax.
 Illustration
Bukol Corporation, a dealer of securities, sold Jollibee
Corporations 10,000 equity shares for P150,000. The shares of
stocks have cost of P10,000 & the sale incurred P10,000
brokerage fee.
The tax applicable to the sale of shares of stocks would be:
Sales Price P 150,000
Less: Cost of equity shares P 100,000
Brokerage fee 10,000 110,000
Net income P 40,000
Multiplied by normal corporate tax rate 30%
Income tax due P 12,000
2) Non-dealers in securities are either liable to stock
transaction tax of 1% based on the selling price or
fair market value, whichever is higher (if trade in the
stock market), or capital gains tax of 5% to 10% base
on capital gains (if not traded-in the stock market).

Assume the same information above except that

Bukol Corporation is not a dealer in securities.
If the equity securities were traded-in the stock market,
the applicable tax would be:
Sales price P 150,000
Multiplied by stock transaction tax rate 0.005
Stock transaction tax P 750
If not traded-in stock market, the applicable tax would be:
Sales Price P 150.000
Less: Cost of equity shares P 100,000
Brokerage fee 10,000 110,000
Capital gains P 40,000
Multiplied by capital gains tax 5%
Capital gains tax P 2,000
 Summary application
SALE OF SHARES OF STOCKS
Subject to Normal Tax based on
Taxable Income
(After Business Expenses)
YES Inventory

Not Traded in Stock Exchange

5% for P 100,000 capital gains

Are stocks held by 10% in excess of P100,000
Dealers in Securities? Filling & payment of capital gains tax=
30 days after each transaction

Traded in Stock Exchange:

Capital
NO
Assets
of 1%of the selling price (Exempt
from Capital Gains Tax)
Filling & payment of percentage tax=
5 days from the date withheld by the
broker
Valuation of Share Not Listed and Traded
in the Local Stock Exchange
In determining the value of the shares of stock not listed in
the stock market, the ADJUSTED NET ASSET METHOD shall be
used whereby all assets and liabilities are adjusted to fair
market value.
The formula to compute the adjusted net asset method
wold be:
Fair value of assets P XXXX
Less: Fair value of liabilities XXXX
Adjusted net asset values P XXXX
The net of adjusted asset minus the liability value is the
indicated value of the equity. The fair value usually
approximates the carrying value (often called the BOOK
VALUE) of the current and monetary assets.
When a company has real properties the appraised value of
the real property as the time off sale shall be the higher of-
1. The fair market value as determine by the Commissioner,
2. The fair market value as shown in the schedule of valued
fixed by the Provincial and City Assessors,
3. The fair market value as determine by Independent
Appraiser
 Illustration
Ernesto sold on March 1, 201A, 1,000 share of stock of M
Corporation for P 1,800,000.

M Corporation has 5,000 outstanding shares with total assets

and liabilities amounting to P 10,000,000 and P6,000,000
respectively. The fair value of its assets and liabilities are also
the market value with the exception of its land with P2,000,000
book value per financial report.
Suppose that the market value of real property of M
Corporation are as follow:
 Traveling Expenses
These are expenses incurred within and outside the country while away from
home in the pursuit of trade, business or profession.
Illustration
Acong reported the following traveling expenses:
Business Seminar (registration Fees, P5,000) P 20,000
Meals and lodging on business seminar 10,000
Visiting friends 5,000
The deductible expenses would be:

Business Seminar (registration Fees, P5,000) P 20,000

Meals and lodging on business seminar 10,000
Traveling Expenses P 30,000
Rent Expense
These are expenses incurred for the continued use or possession of property to
which the taxpayer has not taking title to or in which he has no equity other than
that of a lessee, user or possessor.

Rentals paid for property used in business, whether the property is real of
personal, are deductible as ordinary and necessary business expenses.

When is Rent Deductible?

As a rule, the rent expense is deductible when incurred in relation to trade, business
or profession and the corresponding 5% creditable withholding tax has been made.

On the actual basis, rent is deductible as expense when liability is incurred during
the period of use. While on cash basis, rent is deductible when incurred and paid.

If the advance payment is a prepaid rental, such payment is

 Moving Average Method
If the moving average method were used, the computation of capital
gain on sale of investment in stock would be:

Selling price (P150x75) P 11,250

Less: Cost of shares sold (P 130x 75) 9,750
Capital gain on sale of investment in stock P 1,500

Supporting computation:
Investment in common stocks: No. of shares Cost/share Amount
October 20, 200A 50 P 120 P 6,000
May 10, 200B 50 140 7,000
Totals 100 P 13,000
Divided by number of shares 100
New cost per share P 130
Illustration 2- with stock dividends
Assume further that on November 1, 200B PNB declared stock dividends
(one stock for every stock held) to its stockholders. On December 1, 200B,
Sarah Lee sold 30 common shares at P100 per share.
The capital gain is computed as follows:
FIFO Moving
Average
Selling price (P100x30) P 3,000 P 3,000
Less: Cost of Sales
FIFO (P70x30) 2,100
Moving Average (P65x30) 1,950
Capital gain P 900 P 1,050
 Supporting Computation:
MOVING
FIFO AVERAGE
Total remaining cost- FIFO (P140x25) P 3,500
-Moving Average(P130x25) P 3,250
Divided by number of share
Remaining shares (100-75) 25
Stock Dividends (25x1) 25 50 50
New cost per share P 70 P 65
 Installment Sales of Share of Stock
The determination of the amount of tax due on the instalment
receivable in the instalment sales transaction of share of stock
shall be governed by following rules:
1. If the initial payment does not exceed 25% of the selling
price, an instalment payment of the capital gains tax is
allowed.
2. If the sale is not mortgage sale, the determination of tax
due shall be based on the proportionate ration of the
instalment payment received over the total selling price or
to the total contract price.
Illustration
Assume the following data of Mr. Patbon:

Cost of 5,000 share sold P200,000

Terms of P 250,000 selling price:
Down payment 50,000
Remaining balance equally
If Mr. Patbon chooses to pay the tax due by instalment, the computation of the
instalment tax due would be:

Selling Price P250,000

Less: Cost of shares 200,000
Capital gain P 50,000
Capital gains tax due (P50,000x5%) P 2,500
The formula of tax payable on installment sale of
shares of stock is as follows:

ANNUAL TAX INSTALLMENT PAYMENTS

PAYABLE TAX DUE
CONTRACT PRICE

The tax due annually would be

200A (P50,000/250,000) x P 2,500 P 500
200B (P100,000/250,000) x P 2,500 1,000
200C (P100,000/250,000) x P 2,500 1,000
Total tax payments P 2,500
Note: In the absence of contract price, the selling price is
used as the contract price
3. If the sale is a mortgage sale of stock or where the mortgage on such shares is
assumed by the purchaser, the instalments received refers to the following:
a) The initial payment received, including the excess of the mortgage, if any,
assumed by the purchaser over the basis of the property sold; and
b) Succeeding installments received by the seller.

ILLUSTRATION
Assume the following data of Mr. Patbert:

Cost of 5,000 shares sold P200,000

Mortgage assumed by the buyer 225,000
Terms of P 300,000 selling price:
Down payment 50,000
Remaining balance equally
Illustration- Continuation
The tax due annually would be
200A (P75,000/100,000) x P 5,000 P 3,750
200B (P12,500/100,000) x P 5,000 625
200C (P12,500/100,000) x P 5,000 625
Total tax payments P 5,000

Supporting Computations:
1. Capital gain tax due
Selling Price P300,000
Less: Cost of Sale 200,000
Gain on Sale P100,000
Capital tax due (P100,000 x 5%) P 5,000
 Supporting Computations:- Continuation
2. Percent of initial payments over the selling price
Down payments P 50,000
Add: Excess of mortgage over cost (P225,000-P200,000) 25,000
Initial Payments P75,000
Percentage over the selling price (P75,000-P300,000) 25%
3. Annual installments
Selling price P300,000
Less: Mortgage assumed by the buyer P225,000
Down Payment 50,000 275,000
Balance P 25,000
Divided by remaining years of payments 2
Annual instalments P 12,500
 Supporting Computations:- Continuation

4. Contract price
Selling Price P300,000
Add: Excess of Mortgage over cost 25,000
Total P325,000
Less: Mortgage assumed by the buyer 225,000
Contract price P100,000