For many non-accountants like most of us, it is always a challenge how to simplify tax terminologies to their barest. Take for example the concept of capital gains tax. When you sell a property, you are expected to pay capital gains tax, which is just one of the taxes and duties the seller needs to pay. But why is it that you are liable to pay this type of tax? What is it in the first place?
First things first, although great effort has been taken to ensure the accuracy of this article, it does not intend to replace professional services—nothing beats the expertise of a certified public accountant or a tax lawyer to help you navigate the sometimes ambiguous world of taxation.
Now, our tax code defines capital gains tax as one imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located anywhere in the Philippines. The first part of the definition is easily understood: you are taxed because of a presumed gain. However, the concept becomes difficult because the tax covers disposition of capital assets. What are capital assets then?
Our tax law defines capital assets uniquely by exclusion; that is, those assets that are held by the taxpayer whether or not connected in his trade or business and are not ordinary assets. This presentation leads us with no choice but to know first the meaning of ordinary assets in order for us to know the meaning of capital assets.
Ordinary assets are basically the following:
- stocks in trade or inventory;
- properties for sale in the ordinary course of business;
- any property used in business that the taxpayer claims for depreciation; and
- real property used in trade or business.
In short, if your property is not one of these, the law considers it a capital asset and the sale of which is subject to capital gains tax. This is 6 percent of the gross selling price or fair market value/zonal value of the property, whichever is higher. Check out this website for more information about zonal value.
For those engaged in the real estate profession or business, it is important to know if the asset being disposed is capital or ordinary, especially for purposes of paying the correct taxes. Needless, of course, to say, those employed in the regulated real estate professions—such as consultants, appraisers, and brokers—must have sufficient knowledge on capital gains tax in order for them to provide the correct advise to their clients.