Some, if not all, are not interested with taxes until they are involved in paying such. Lucky are those students in Business Administration Schools and Law Schools because taxes are thoroughly discussed in their Taxation subject in the higher years. In our previous column, we discussed sale from ordinary assets resulting to ordinary income and its taxes. For now, we will focus with the other type. So if last time, we defined what ordinary assets are, how about capital assets? Capital Assets means property held by the taxpayer (whether or not connected with his trade or business) which is not considered Ordinary Assets. Reiterating, ordinary assets are properties which include stock in trade of the taxpayer or other property of a kind which would be properly included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to the customers in the ordinary course of trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation or real property used in trade or business of the taxpayer. In short, it only applies to real property which was not used in the trade or business of the vendor/transferor.
It says under Republic Act (R.A.) No. 8424, “The Tax Reform Act of 1997, which took effect on January 1, 1998, sale of capital assets shall be liable to capital gains tax (CGT) and the sale of ordinary assets shall be liable under ordinary income taxation regardless of whether the seller is a corporation or an individual.”
What are the factors to be considered in determining whether an asset sold is capital or ordinary? Well, the purpose for which the property was initially acquired must be considered. The purpose for which the property was subsequently held must be looked into. Another is the extent which improvements, if any, were made to the property by the taxpayer. Also, the frequency, number and continuity of sales; the extent and nature of the transactions involved; the ordinary business of the taxpayer; the listing of the property with real estate brokers; and the purpose for which the property was held at the time of sale.
The objects of taxation maybe persons, whether natural or juridical; property, whether real or personal, tangible or intangible; transactions, business, interests or privileges.
When a transaction is subject to Philippine Income tax, the applicable income tax under the Tax Code generally depends upon the person making the transaction (e.g., sale of exchange of property); on the nature of the real property sold or exchanged, whether it is ordinary asset or capital asset; on the source of income, which for the sale or exchange or real property is dependent on the location of the real property sold or exchanged; and on the method of accounting used in computing income for the year.
It is very important for a real estate practitioner to be able to determine whether the subject real estate is a capital asset or an ordinary asset.
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(The writers are both Investment Adviser and Advocate of Personal Finance. They are engaged in Stock Market Investing. Also, they are active Licensed Real Estate Practitioners. For financial planning and speaking engagements, you may contact them with CP # 0919-376-2922 or Tel. No. (074) 244-4026).
