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

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The Capital Gains Law is an inescapable tax law that every seller has to abide. But how does it exactly apply in the Philippines?

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 propertytaxes 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 are one of these inescapable taxes.

If you’re not familiar with the term, the capital gains tax is imposed on the seller’s earnings, which has been acquired from the sale of capital assets.

Now, what is a capital asset? 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 in the Philippines.

Q: Where can I find the capital gains law?

A: 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 belong, 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.

Q: Who is this tax applicable to?

A: Again, if the property you’ve sold does not fall under the aforementioned conditions, it is automatically considered as 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 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.

Q: How much of the selling price is liable for tax?

A: 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.

According to Section 24D, all real properties have a capital gains tax of six percent, which is based on the gross selling price or current fair market value–whichever one is higher of the two.

For example, 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.

Q: Aren’t there any exceptions?

A: 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.

Hopefully, this information will arm you in keeping your finances and assets in check.

Read on for more Q&A articles.

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