Capital Gains Tax – Train Law Update

CAPITAL GAINS TAX

Capital Gains Tax (CGT) is the tax on gains from sale of the following Capital Assets:

  • Real Property located in the Philippines – CGT rate is 6% of FV or SP whichever is higher
  • Unlisted Domestic Shares of Stock (whether preferred or common) – updated CGT rate is 15% of the gain

Sale of other personal properties classified as capital assets are subject to regular income tax.

Capital Gains Tax on Sale of Real Property

The sale of Real Property in the Philippines classified as a capital asset is taxed 6% capital gains tax based on the highest among the following values:

  • Zonal Value as determined by the BIR
  • Assessed value as per assessor’s office
  • Selling Price

Sample Problem – Capital Gains Tax on Sale of Real Property

Mr. Don Alak sold his residential house and lot at a Selling Price of P5M. The Zonal Value as per BIR at the time of sale was P4.5M while the assessed value amounted to P6M. The house and lot was purchased at a cost of P3M. The Capital Gains Tax would be computed as follows:

Assessed Value of P6M x CGT Rate of 6% = P360,000

Note that the gain on sale (P5M selling price less P3M cost) is irrelevant in computing for the CGT on sale of real property.

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Exemption from 6% CGT on Sale of Real Property

If the seller of the real property uses the proceeds to purchase a new principal residence, the sale would be exempt from the 6% capital gains tax provided that:

  1. the seller must be a citizen or resident alien
  2. the sale involves the principal residence of the seller
  3. the proceeds are utilized to purchase a new principal residence
  4. the BIR is notified by the taxpayer of his intention to avail of the exemption within 30 days of the sale
  5. the reacquisition of the new residence must be within 18 months from the date of sale
  6. the capital gains tax is held in escrow in favor of the government
  7. the exemption can be availed once every 10 years
  8. the historical cost or adjusted basis of the principal residence shall be carried over to the new principal residence.

Let us assume that in the above example, Don Alak used all the proceeds to purchase a new residence.

  1. What amount should be deposited in escrow? – the amount to be deposited in escrow is the total capital gains tax amounting to P360,000.
  2. How much is the exemption? – if Don Alak is able to comply with all the requisites, the sale would be exempt from the 6% capital gains tax and all of the P360,000 deposited in escrow would be returned to him.
  3. How much is the exemption if only P4M of the proceeds of sale was utilized to purchase a new residence? – the exemption would be computed as follows: P4M/P5M x P360,000 = P288,000. The CGT to be given to the BIR would be P360,000 – P288,000 = P72,000.

The Train Law did not make any changes regarding sale of real property classified as capital asset.

Capital Gains Tax on Sale of Unlisted Domestic Stocks

The old BIR law indicated that the sale of unlisted domestic stocks would be taxed as follows regardless of classification of taxpayer:

  • 5% on the first P100,000 gain
  • 10% on the gain in excess of P100,000

The Train Law has amended this rule to simplify the sale of Unlisted Stocks. For all types of individual taxpayers and also for domestic corporations, the CGT on the sale of unlisted domestic stocks would be 15% of the gain. For foreign corporations, the old law still applies.

Sample Problem – Capital Gains Tax on Sale of Unlisted Domestic Stocks

Ben Mel sold stocks of Rams Corp which cost P300,000 for P700,000. How much is the capital gains tax assuming the sale was made on:

  1. 2017
  2. 2018
Click to show the Answer

Computation of CGT if sale was made in 2017:

  • P700,000 – p300,000 = P400,000 gain
  • P100,00 x 5% = P5,000 tax on first P100,000 gain
  • P300,000 x 10% = P30,000 tax on excess over P100,000 gain
  • P5,000 + P30,000 = P35,000 total Capital Gains Tax

Computation of CGT if sale was made in 2018:

  • P400,000 x 15% = P60,000 Capital Gains Tax