What is capital gains tax?

What are capital assets? 

 As defined by the Bureau of Internal Revenue: “The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be 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 customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.”

To simplify, capital assets are property that has not been used for business.

What is Capital Gains Tax (CGT)?

As defined by the Bureau of Internal Revenue: “Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale”

What is the rate for CGT? 

“For real property - 6%.”

CGT Sample calculations

Important note: The below examples are simplified examples. As always please verify with BIR what taxes are actually involved.

Example 1:  Juan wants to sell his own residential house and lot for Php5M. 
Answer: CGT = 5M x 6% = 300k; He will get 4.7M net of proceeds from the sale assuming CGT is the only deduction from proceeds.

Example 2: Juan wants to sell his office space that is currently tenanted. He wants to sell it for Php5M.
Answer: Since the property is actually being used for the business then the property isn't classified as a capital asset instead it is classified as a ordinary asset. Therefore CGT = 0. As an ordinary asset though, it is subject to other taxes.