Mr. Pedro Aguirre, a resident citizen, is working for a large real estate development company in the country and in 2010, he was promoted to Vice-President of the company. With more responsibilities comes higher pay. In 2011, he decided to buy a new car worth P2 Million and he traded-in his old car with a market value of P800,000.00 and paid the difference of P1.2 Million to the car company. The old car, which was bought three (3) years ago by the father of Mr. Pedro Aguirre at price of P700,000.00 was donated by him and registered in the name of his son. The corresponding donor’s tax thereon was duly paid by the father.
a) How much is the cost basis of the old car to Mr. Aguirre? Explain your answer (2%)
b) What is the nature of the old car – capital asset or ordinary asset? Explain your answer. (3%)
c) Is Mr. Aguirre liable to pay income tax on the gain from the sale of his old car? Explain your answer. (5%)
Suggested answer only. Not an official answer and not legal advice.
a) The cost basis is P700,000. b) The old car is a capital asset. c) Yes, Mr. Aguirre is liable for income tax on the recognized gain of P50,000.
Under Sec. 40(B)(3), NIRC, the basis of property acquired by gift is the carry-over basis. Under Sec. 39(A)(1), non-business personal property is a capital asset. Under Sec. 39(B), capital gains from assets held over 12 months are recognized at 50%.
Since the car was acquired by gift, its basis is the father's cost of P700,000. As a personal car, it is a capital asset. Trading it in at P800,000 yields a P100,000 capital gain, of which 50% (P50,000) is taxable under the 3-year holding period.
Thus, the cost basis is P700,000, the car is a capital asset, and Mr. Aguirre owes income tax on P50,000 capital gain.
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
What is the cost basis of property acquired by gift or donation under Section 40(B)(3) of the NIRC?
Under Section 40(B)(3) of the NIRC, the basis of property acquired by gift is the carry-over basis from the donor.
How is a personal motor vehicle owned by a corporate executive for private use classified for tax purposes?
Property held by a taxpayer for personal use and not connected with business is classified as a capital asset.
What percentage of capital gain is recognized in gross income if an individual holds a capital asset for more than twelve months?
Under Section 39(B) of the NIRC, capital gains from assets held over twelve months are recognized at fifty percent.
If a donated car purchased for P700,000 is traded in at an agreed value of P800,000 after three years, what is the total realized gain?
The total realized gain is the trade-in value of P800,000 minus the carry-over cost basis of P700,000, which equals P100,000.
How much taxable capital gain must an individual report if a P100,000 gain is realized on a capital asset held for three years?
Because the asset was held for more than twelve months, fifty percent of the P100,000 gain (P50,000) is included in taxable income.
Learn more about these topics
1. Gift Cost Basis
Under Section 40(B)(3) of the National Internal Revenue Code, the basis of property acquired by gift or donation is the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift. When a father donates a motor vehicle to his son, the son steps into the shoes of the father regarding property valuation. Consequently, the donee's tax basis for determining capital gain or loss upon a subsequent sale or exchange is the donor's original acquisition cost.
2. Capital Asset Classification
Under Section 39(A)(1) of the Tax Code, capital assets are defined by exclusion as all property held by a taxpayer, whether or not connected with his trade or business, except stock in trade, real property used in trade or business, or property subject to depreciation. A personal automobile owned by an executive for private transportation and non-commercial use does not fall under any statutory exception. Therefore, a personal vehicle constitutes a capital asset, and any gain realized from its trade-in or disposition is taxed as capital gain.
3. Holding Period Rule
Under Section 39(B) of the Tax Code, gains or losses realized by an individual taxpayer upon the sale or exchange of a capital asset held for more than twelve months are recognized at fifty percent of the net capital gain. When an asset has been held for three years prior to disposition, only half of the calculated gain is included in gross income for income tax computation. The remaining fifty percent of the gain is statutorily exempt from personal income taxation.