Capital gains tax (CGT) is essential in completing a real estate sale. Learn what it is and who pays for it.
Q: What is Capital Gains Tax (CGT)?
A: When during the sale of a property, the term “capital gains tax” will come up, as it is one of the types of taxes that need to be settled in order to complete the transaction. But what is it exactly, who is required to pay for it, and how is it done?
Capital gains tax (CGT) is a kind of tax paid by the property seller for the earnings they have gained during the sale. It’s important to note, though, that CGT is only paid for the sale of capital assets, and not ordinary assets. According to Section 39 (A)(1) of the Tax Code, capital assets refer to property held by the taxpayer (whether or not connected with his trade or business), but does not include:
1. 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
2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,
3. Property used in the trade or business subject for depreciation
4. Real property used in trade or business of the taxpayer
Basically, if the property being sold does not fall under any of these conditions, it is a capital asset and is subject to CGT.
As indicated in Section 39(B), the CGT is equal to 6% of the gross selling price or current fair market value of the property, whichever is higher. This amount is to be paid within 30 days after each sale, exchange, transfer, or other disposition of real property.
In paying the CGT, three copies of the Bureau of Internal Revenue (BIR) Form 1706, or the Final Capital Gains Tax Return (For Onerous Transfer of Real Property Classified as Capital Assets – Taxable and Exempt) should be accomplished and submitted to an authorized agent bank (AAB) in the Revenue District where the property is located, or directly with the Revenue Collection Officer or Authorized city of Municipal Treasurer if the area has no AAB.
The following documentary requirements will also need to be presented:
1. One original copy and one photocopy of the Notarized Deed of Sale or Exchange
2. Photocopy of the Original Certificate of Title; Transfer Certificate of Title; or Condominium Certificate of Title in case of a condo unit
3. Certified True Copy of the tax declaration on the lot and/or improvement during nearest time of sale
4. “Certificate of No Improvement” issued by the Assessor’s office where the property has no declared improvement, if applicable or Sworn Declaration/Affidavit of No Improvement by at least one (1) of the transferees
5. Copy of BIR Ruling for tax exemption confirmed by BIR, if applicable
6. Duly approved Tax Debit Memo, if applicable
7. “Sworn Declaration of Intent” as prescribed under Revenue Regulations 13-99, if the transaction is tax-exempt
8. Documents supporting the exemption
9. Additional requirements may be requested for presentation during audit of the tax case depending upon existing audit procedures.
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