Capital Gains Tax

What is Capital Gains Tax?

According to the Philippine Tax Code, capital gains tax or CGT is a tax that is imposed on earnings the seller has gained from the sale of capital assets. It is charged at a flat tax rate of 6% of the gross selling price, and must be paid within 30 days after each transaction.

Simple enough, right? Whenever you sell a piece of property be it a house or land, you must pay the CGT. The complication however, arises in the differentiation between capital assets, which are subject to capital gains tax, and ordinary assets, which are not, as both are defined strictly by the Philippine law.

Ordinary Assets vs. Capital Assets

Many simply define capital assets as properties that are not used in trade or in business. Although correct, this definition may still seem vague or lacking to some people. To be more specific, if the property being sold is not one of those below, it is considered as a capital asset and subject to capital gains tax.

According to Section 39 of the tax code, the following are deemed ordinary assets:

1. Stocks held by the taxpayer in trade or inventory
2. Properties for sale in the ordinary course of business
3. Any property used in business that the taxpayer claims for depreciation
4. Real property used in trade or business.

Who Pays for Capital Gains Tax in the Philippines?

A: It is always the seller who pays for the CGT and not the buyer, as long as the seller is not engaged in the real estate business. Otherwise, the sold property would be considered as an ordinary asset, making the seller not eligible to pay capital gains tax (although ordinary assets are subject to other taxes).

In relation to the previous section, the law also stipulates than an asset is deemed either capital or ordinary depending on who owns it at the time it is being sold. As already mentioned, if the owner is deemed a person engaged in the real estate business, and can present substantial evidence of being so, then the property is considered as an ordinary asset not subject to capital gains tax.

The following are people classed as engaged in the real estate business:

Real estate dealer: a person engaged in the business of buying and selling properties, regardless if the business is being done so full- or part-time
Real estate developer: a legal entity (a person or a company) engaged in the business of developing properties—subdivisions, houses, condominiums, townhouses, commercial buildings, and even memorial lots—and offering them up for sale or lease
Real estate lessor: a person engaged in the business of renting real properties (residential or commercial) and declaring him or herself as the legal lessor of the said properties

Although banks are not considered entities engaged in the business of real estate, assets they have acquired through foreclosures are considered ordinary assets; thus, they are not required to pay the GCT.

How Do You Calculate Capital Gains Tax?

A capital gains tax example calculation would be a 200 square meter residential lot in Makati City is being put up for sale for PHP 3 million. The owner is a person not engaged in the real estate business. If the property’s selling price of PHP 3 million is higher than its fair market value (as determined by the city assessor or by the Bureau of Internal Revenue’s zonal values), then it will be used as the base for computing the CGT, which is 6% of the selling price. Thus, PHP 3,000,000 x 6% = PHP 180,000 GCT.

Capital Gains Tax