Summary
Highlights
The video introduces the topic of dealings in properties, specifically differentiating between ordinary and capital assets. It highlights that previous videos covered compensation, business, professional, and passive income, and this one will focus on capital gains, starting with the distinction between ordinary and capital assets and their tax treatments.
The learning objectives include classifying assets, determining tax treatments for gains, applying withholding taxes on asset sales, and computing these taxes. Ordinary assets are explicitly defined by the National Internal Revenue Code as inventories, stocks in trade, personal properties used in business or subjected to depreciation, real property held for sale to customers, and real properties used in business (excluding investment property).
Capital assets are defined by exclusion: any property not classified as an ordinary asset is a capital asset. Examples include properties not used in business, residential lots, personal homes, family cars, receivables from inventory sales, and investment properties held for lease or wealth accumulation.
Classifying assets is crucial because ordinary gains and losses are treated and taxed differently from capital gains and losses. Ordinary gains are subject to normal tax rates (graduated for individuals, corporate tax for companies) and are added to gross income, while ordinary losses are deducted. Capital gains, however, may be subject to a specific capital gains tax, which will be covered in a separate video.
For personal properties, whether classified as inventory (e.g., cars for a dealer) or non-inventory but used in business (e.g., office tables, printers), the tax treatment is the same: ordinary gains are added to gross income, and ordinary losses are deducted. An example is provided with a sole proprietor selling auto parts (inventory) and used computer equipment (used in business).
Real properties classified as inventory (e.g., houses sold by a developer) are subject to creditable withholding taxes (CWT). Exemptions apply if the seller is registered under HLURB and the selling price is below a certain threshold, or if registered under BOI/PEZA, or if the seller is a government agency like GSIS or SSS. Otherwise, CWT rates vary from 1.5% to 5% based on the selling price.
Real properties that are not inventory but are used in business (e.g., an office building or warehouse) are subject to a uniform 6% creditable withholding tax, regardless of the selling price. The video emphasizes that for ordinary assets, all withholding taxes are creditable, not final taxes, and will be credited against the annual income tax due.
A detailed example with XYZ Company, a realtor, demonstrates the calculation of ordinary gains/losses and applicable CWT for various sales. It shows how different properties (real property inventory, real property used in business, personal property used in business) are taxed. Finally, it illustrates how the total CWT is credited against the company's income tax liability, reducing the final amount payable to the BIR.