Guide on Real Estate Taxation of Capital Asset and Ordinary Asset in the Philippines
Written by
Julia Rosanne R. Alcoseba, CPA
Taxation of Real Estate Transactions
Are you looking to sell a house in the Philippines or considering launching a real estate business? You don't want to be surprised with additional cost and taxes when closing a real estate transaction. Keep in mind that paying taxes on the property is a crucial part of these pursuits.
When it's time to buy or sell real property, it entails the payment of taxes and it's important to compute the taxes correctly. Under the National Internal Revenue Code of the Philippines, there are two ways to name or classify your real estate assets - the ordinary and capital assets. Understanding these classifications is essential to avoid potential tax errors and their consequences. Learn more about them below to ensure you're on the right track with your real estate transactions.
Defining Capital Asset
Capital assets are properties owned by or under the taxpayer's custody that are not used for business purposes. Key points to note about capital assets include:
1. Property not used in business
2. Asset held merely for investment
3. Personal or non-business property
Defining Ordinary Asset
On the other hand, ordinary assets live up to their name because they are properties used in the ordinary course of business by taxpayers for industry, trade, or customer sales. Ordinary assets include:
1. Stock included in the inventory of the taxpayer
2. Property primarily held for sale
3. Property used in business which is capitalized
4. Real property used in the trade, business, or profession of the taxpayer
Taxation of Capital and Ordinary Asset in the Philippines
With a clear understanding of how to categorize your assets, the process of calculating the tax owed becomes much more straightforward, relieving any potential stress.
The gain on the sale of ordinary assets is added to the taxpayer's income when filing its income tax return, while the loss can be deducted from the taxpayer's income tax return if the taxpayer chooses an itemized deduction. To be more specific, the sale of ordinary assets will be subjected to the following tax rates:
a. 20% or 25% Corporate Income Tax rate if the taxpayer is a corporation.
b. Graduated Income Tax Rate or 8% if the taxpayer is an individual.
c. 12% Value Added Tax base on gross selling price if the taxpayer is VAT-registered.
d. 3% Percentage Tax base on gross selling price if the taxpayer is NonVAT- registered.
On the other hand, the taxation of capital assets can be tricky, as there are several factors that need to be taken into consideration.
a. The sale of domestic shares and securities held by taxpayers other than dealers insecurities as capital assets is subject to Capital Gains Tax. The tax will be based on "Net Capital Gains," which means the amount obtained from sales or exchanges of capital assets after deducting any losses from such sales or exchanges.
b. Sale of real properties in the Philippines classified as capital assets are subject to 6% Capital Gains Tax. The value of the real property will be based on the selling price, fair market value or zonal value as determined by the Commissioner of Internal Revenue or the fair market value as shown in the schedule of values of the Provincial or City Assessor, whichever is higher.
c. The Net Capital Gains on sale of capital assets other than mentioned above are added in the income tax return of the taxpayer subject to the same tax rates as the ordinary assets mentioned above. It’s also good to note that capital loss is allowed only against capital gains.
These elements can be extremely difficult for someone unfamiliar with the documentation and procedures. Please do not hesitate to contact us if you need assistance.
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