Are you trying to sell your house in the Philippines? Or are you trying to start a property buy-and-sell business model? If you are doing any of the two, you should remember to pay taxes on the property for capital gains.
When it’s time to make payments, expert tax services in Manila said you will have to compute your taxes properly so make sure that your properties are labeled correctly. There are two ways in which you can label or classify your assets–ordinary and capital assets. Learn more about them below and avoid errors when filing your tax returns:
What Are Capital Assets?
Capital assets are properties held or properties that are in the taxpayer’s possession. These are properties that are not being used for business. Capital assets are non-inclusive of the following:
- Business stocks
- Any on-hand properties by the end of the taxable year that is included in the taxpayer’s inventory
- Held for sale in the day-to-day course of business operations
- Properties that are subject to depreciation
- Real property used in the business
What are Ordinary Assets?
In contrast, ordinary assets live up to their name as they are the properties that taxpayers use in business, trade, or customer sale in the ordinary course of the business. The qualifying term here is needed for daily operations of business.
A Guide To Classifying Your Assets
Classifying your assets will depend on the nature of your business. Let’s say, you are an owner of a real estate company. In a real estate company, you will be required to possess the properties instead of inventory in your ordinary business operation. Therefore, a real estate company would be considered an ordinary asset since it is needed for day-to-day operations.
If your company is not engaged in the sale of properties or trade, your properties are considered capital assets. Accounting services in the Philippines emphasized that you should know the difference between the two for you to pay the right taxes.
Conversion of Classification of Assets
Conversion of classification may happen in certain situations. If you’re a taxpayer who is having a difficult time financially and you decide to shut down your business operations (whether permanent or temporary business closure), you may convert the classification of your assets.
If you have properties classified under ordinary assets that you decide to use for your business, then you must convert them from ordinary to capital assets. You should also ensure that you have proof showing that your property has not been used for more than 2 years before you can proceed to collate the taxable transactions of your properties.
Sale of Capital Assets
Selling your capital assets requires you to pay tax for capital gains. According to tax and audit services in the Philippines, the current tax rate is 6 percent of the fair market value or gross selling price at the time the sale happened.
Notably, undervaluing the sale will no longer work because the tax officials will base the taxes of underpriced properties on the current zonal values. You will also need to pay documentary stamp taxes and other miscellaneous expenses such as payments for the LGU or the local government unit and legal expenses.
Sale of Ordinary Assets
Selling your ordinary assets will be taxed with a creditable withholding tax that ranges from 1.5 percent to 6 percent tax rate to the ordinary income. It also comes with 12 percent VAT or value-added tax and documentary stamp tax. Selling ordinary assets will fall under day-to-day operations so the computations should be under income tax.
All of these details can be very confusing for someone who is not familiar with the documents and procedural requirements. If you need assistance on this matter, don’t hesitate to seek our help. We offer accounting services in Pasig and beyond for individuals and organizations. Our team is a one-stop shop for everything accounting from bookkeeping to business registration help. We service both domestic and foreign clients, so take advantage of our free 30-minute consultation and book a slot today.