Mr. Jose Castillo is a resident Filipino Citizen. He purchased a parcel of land in Makati City in 1970 at a consideration of P1 Million. In 2011, the land , which remained undeveloped and idle, had a fair market value of P20Million. Mr. Antonio Ayala, another Filipino citizen, is very much interested in the property and he offered to buy the same for P20 Million. The Assessor of Makati City re-assessed in 2011 the property at P10 Million.
a) When is Mr. Castillo liable for real property tax on the land beginning 2011 or beginning 2012? Explain your answer. (2%)
b) Is Mr. Castillo liable for income tax in 2011 based on the offer to buy by Mr. Ayala? Explain your answer. (3%)
c) Should Mr. Castillo agree to sell the land to Mr. Ayala in 2012 for P20 Million, subject to the condition as stated in The Deed of Sale that the buyer shall assume the capital gains tax thereon, how musch is the income tax due on the transaction and when must the tax return be filed and the tax be paid by the taxpayer? Explain your answer. (5%)
Suggested answer only. Not an official answer and not legal advice.
a) RPT re-assessment applies beginning 2012. b) No income tax is due in 2011. c) CGT is P1,200,000 (or P1,276,595.74 grossed-up), due within 30 days of sale.
Under Sec. 221, LGC, re-assessments take effect on Jan. 1 of the next year. Income tax requires realized gain from a closed transaction (Madrigal v. Rafferty). Under Sec. 24(D)(1), NIRC, 6% CGT applies on selling price, due within 30 days.
The 2011 re-assessment takes effect in 2012. The 2011 offer is an unearned increase without a closed sale. In 2012, sale at P20M yields P1.2M CGT (or P1,276,595.74 if grossed-up), payable within 30 days of notarization.
Thus, RPT re-assessment takes effect in 2012, no tax is due in 2011, and 6% CGT is due within 30 days in 2012.
This is not an official scoring system and carries no weight with the Supreme Court or any bar review provider. It measures how much of the suggested answer's wording your response covers, not whether your reasoning is correct. For practice only.
Quick check
When does a real property tax reassessment conducted by a local assessor take effect under Section 221 of the Local Government Code?
Reassessments of real property take effect on January 1 of the year following their completion under Section 221 of the LGC.
Is a property owner liable for income tax upon receiving an unaccepted purchase offer at a price higher than the original acquisition cost?
Income is taxable only when realized through a closed sale or completed transaction.
What is the statutory tax rate for capital gains tax on the sale of real property located in the Philippines by a resident citizen?
Capital gains tax on individual real property sales is six percent of gross selling price or fair market value, whichever is higher.
Within what period must the capital gains tax return be filed and the tax paid following the sale of real property classified as a capital asset?
Capital gains tax returns must be filed and paid within thirty days from the date of disposition under tax rules.
If a buyer agrees in the deed of sale to assume the seller's six percent capital gains tax, how is the contract treated for tax computation?
A buyer's agreement to assume capital gains tax increases the effective gross selling price for tax computation.
Learn more about these topics
1. Real Property Re-assessment
Under Section 221 of the Local Government Code, any general revision of real property assessment or reassessment of real property tax made by the local assessor takes effect on the first day of January of the year following the completion of the reassessment. Consequently, a reassessment conducted in 2011 does not retroactively alter the tax liability for that same year. The taxpayer becomes legally liable to pay real property tax based on the new assessed valuation beginning January 1, 2012.
2. Realization of Income
Under Philippine income tax law, income is taxable only when realized through a completed sale or closed transaction. An unaccepted purchase offer or a simple increase in the fair market value of real property represents mere unrealized capital appreciation. Until title or beneficial ownership of the land is actually transferred to a buyer for consideration, no taxable gain accrues to the property owner. Therefore, an unaccepted offer to buy creates no income tax liability.
3. Capital Gains Tax
Under Section 24(D)(1) of the Tax Code, a final capital gains tax of six percent is imposed on gains presumed to have been realized from the sale of real property located in the Philippines classified as a capital asset. The tax base is the gross selling price or fair market value, whichever is higher. The statutory tax return must be filed and the tax paid within thirty days following the execution and notarization of the deed of sale.