Q&A: What is Capital Gains Tax and Who Pays for It?

Property sellers are subject to capital gains tax rate of six percent on the sale of a real property. With the TRAIN law, individual and domestic corporations must pay capital gains tax at 15 percent. Payment should be within 30 days after the sale of the capital assets.

For those who’ve sold a property or who are still selling their property, you may have been surprised to find out that there are taxes that come with a newly purchased property—taxes that the seller pays for, and not the buyer. Whether it’s your first time selling or whether it’s your hundredth time, you’re still liable to pay for these taxes. The capital gains tax are one of these inescapable taxes.

What Is the Meaning of Capital Gains Tax?

Capital gains tax on real estate refers to the tax imposed on a seller’s profit from selling a property classified under capital assets. Capital assets are properties owned by a taxpayer not used in any form of trade or business. Examples of capital assets are homes, land, or cars that are not income-generating. A capital gains tax is deducted from the property’s gross selling price or market value, whichever is higher. 

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How can we define capital gains tax? It is a type of tax applied to the profits that you earned for the sale of an asset. Unlike taxes on ordinary income, which automatically occur each year when new income is earned by the individual, capital gains taxes are only levied once the real estate assets are actually sold.

What is a Capital Asset in the First Place?

According to Section 39 of the tax code, a capital asset is a property sold or being sold that is not one of the following:

  • Properties for sale in the ordinary course of business
  • Real property used in trade or business
  • Stocks held by the taxpayer in trade or inventory
  • Any property used in business that the taxpayer claims for depreciation

If the property for sale falls under any of these, the property’s considered to be an ordinary asset and not a capital asset.

Capital gains laws in every country differ. What applies in America may not exactly be applicable here in the Pearl of the Orient. So, here’s everything you need to know about the capital gains law and capital gains tax in the Philippines.

Where Can I Find the Capital Gains Law?

For those who may be wondering where this particular tax code can be found, it’s under the National Internal Revenue Code of the Bureau of Internal Revenue (BIR). The sections dedicated to the capital gains law are found under sections 24C, 24D, 27D(2), 27D(5), 28(A)(7)(c), 28(B)(5)(c), and 39A.

These sections cover the whole breadth and depth of how the Philippines handles capital gains taxes. The sections may not exactly be long, but they can be hard to digest, especially when you’re not used to reading heavy legal documents. Luckily, we’ve managed to cut them down into bite-sized chunks for you.

Who Pays Capital Gains Tax in PH, the Buyer or Seller?

Since capital gains tax is applied to the sale of capital assets, paying it is obviously the responsibility of the seller. Again, it’s important to know if yours is a capital asset. This includes properties under pacto de retro sales and other forms of conditional sale.

A pacto de retro sale is defined as a transaction wherein the seller has the right to repurchase the property being sold to him or her. This is done in order to immediately transfer the title and ownership of said property to the vendee a retro.

Conditional sales, on the other hand, are much like the average real estate standard offers; however, the parties involved have set conditions for each other. Examples of these conditions may be approved by a co-purchaser, the receipt and review of a survey showing that the property complies with zoning regulations, a title search showing no unacceptable liens or encumbrances, confirmation from the current mortgagee that the property is not in foreclosure, etc.

However, this capital gains tax is only applicable to the properties located within the Philippines and not those from abroad. So for those who’re selling condo units in Korea or a house and lot in Australia, this tax is not applicable to you.

How Is Capital Gains Tax Calculated in PH?

One of the reasons why it’s important to be aware of the capital gains law in the Philippines is because its tax amount isn’t exactly cheap to pay for.

What is the capital gains tax rate in the Philippines? 

According to Section 24D, capital gains from the sale of real estate properties in the Philippines have a capital gains tax of 6 percent, which is based on the gross selling price or current fair market value–whichever one is higher of the two. This includes capital gains from the sale of real estate property located in the Philippines classified as capital assets by individuals. Take note that this capital gains is not subject to a holding period and is subject to special capital gains tax rates. 

To get the capital gains tax computation, you determine the higher value of the property, and multiply the same with 6%. Keep in mind that the tax rate is 5% for the first P100,000 and 10% in excess of P100,000 of the net capital gains. The cost of the shares and the related selling expenses are in fact deductible.

Here’s a sample computation of capital gains tax on sale of property: if you’re selling a property for a total of Php 2,400,000, then the capital gains tax will amount to Php 144,000. On the other hand, if the current fair market value of the property amounts to Php 2,800,000 and not Php 2,400,000, then the total capital gains tax for the said property would then be Php 168,000 and not Php 144,000.

This may be something inconsequential to people who just want to be rid of the property, but probably not to those who’re hoping to turn their profit into an investment for something else.

When to Pay Capital Gains Tax on Real Estate

You’re required to settle capital gains tax within 30 days after the sale of your property. Accomplish the capital gains tax form and have it processed in any authorized agent bank or with the revenue collection officer of the Revenue District Office (RDO), which has jurisdiction in the location of the property in question.

Take note that the penalty for late payment of capital gains tax in the Philippines is 25 percent surcharge on basic tax due (50% surcharge in cases of fraud or intent to evade tax) and 20 percent interest per annum.

Are There Exceptions to Capital Gains Tax?

As with everything in life, there are always exceptions to the rule.  People who are selling their properties in order to acquire or construct a new home are exempted from this rule, but only if they ensure that the money will actually go to the new property and not elsewhere.

The Commissioner of the BIR must be notified regarding the intention to allocate the money to the new property and the seller must not have availed for this tax exemption in the last decade.

What Is the Capital Gains Tax for 2020?

Because of the Tax Reform for Acceleration and Inclusion (TRAIN) Law, capital gains tax is currently at 15% for individual and domestic corporations, effective since January 1, 2018. The TRAIN Law is part of the government’s project called the Comprehensive Tax Reform Program for the National Internal Revenue Code of 1997. Before the TRAIN Law, the standard capital gains tax deducted is 6% and can range from 5% to 10%. 

How Do I Minimize Capital Gains Tax?

You can minimize capital gains tax by implementing investment incentives, tax incentives, and exemptions. Capital assets exempted from capital gains tax are securities sold by regular securities dealers, government-owned real properties, unwarranted real properties, agricultural land covered by the Comprehensive Agrarian Reform Law, and individuals engaged in real property exchange for shares of stocks. Among the most common capital assets exempted from capital gains tax are primary residences.

To prove that a property is used as a primary residence, the address must be the same as what was filed in the owner’s latest Income Tax Return (ITR). Declaration of the property as a primary residence will exempt the property from capital gains tax. However, sellers can only use such exemptions once every 10 years. 

Do Seniors Have to Pay Capital Gains?

One of the privileges of senior citizens in the Philippines is exemptions and deductions on certain forms of taxes. However, under the Expanded Senior Citizen Act of 2010, among senior citizens liabilities’ are capital gains taxes. Capital gains tax deducted from a senior citizens’ profit from selling a capital asset will be in accordance with the law that is currently in effect. The capital gains tax will depend on the property’s gross selling price or market value. It will not be affected by any special privileges such as tax deductions for senior citizens. 

Do Capital Gains Count as Income?

Although capital gains can be taxed as income, the capital gains tax return is filed separately 30 days after the capital asset or property is sold. Because of the complex trait of capital gains and its special exemptions, it is required to be filed separately from the ITR.

Hopefully, this blog will arm you with the information needed to keep your finances and assets in check, especially when it comes to capital gains tax computation. Read on for more Q&A articles.

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