Selling a house for the first time? Here are a couple of things that you should take notice of before committing. Masked under a layer of taxes, there are many underlying terms and taxes to consider. To stay safe against many unsuspecting fees, one should always arm themselves with invaluable knowledge before taking the plunge. And yes, whether you like it or not, capital gains are unavoidable taxes that need to be taken care of.
What Is Capital Gain Tax And Who Pays For It?
For the uninitiated, capital gains tax is enforced on a seller’s revenue that’s garnered from the sale of capital assets.
Capital gains can be separated into two of these categories:
Long-Term Capital Gains are types of assets that have been held for more than 3 years. However for equities and mutual funds, this period is reduced to just 1 year.
Short-Term Capital Gains are assets that’s sold within 3 years of buying it and the profit on selling the gain is known as a short-term capital gain.
How To Calculate Capital Gain Tax?
It is subjected upon the level of capital gain.
Simpler and easier, calculating capital gains rate on short-term capital gains is added to your total income while the Income Tax is tabulated based on the bracket that matches you.
Tabulating tax for long-term capital gains differs slightly though. As long-term capital gains are kept for a longer time, inflation also occur when computing tax.
You can calculate capital gains tax through one of the many online tools that are available online. One should always take note of these:
- Sale price
- Purchase detail info; date and the year of said purchase
- Purchase price fair market
- Other additional investment info, if needed. The capital gains might have been invested in debt funds, gold, shares, equity funds, fixed maturity plans, or real estate.
Once you have provided the relevant info, these criterias will go towards calculating your capital gains payable:
- Investment type selling price
- Short-term or long-term gain
- Long-term capital gain without indexation
- Long-term capital gain with indexation
- Cost of inflation index
- Cost inflation index of the year of sale
- Variation between the sale price and purchase price
- Purchase index cost
- Period between the sale and purchase
How Do You Define A Capital Asset?
It is a sold property or one that’s in the midst of obtaining a buyer. However, they do not apply to the following:
- The sale of properties during real business proceedings
- Business or trade property
- Stock that’s stored by a taxpayer for inventory or trade
- Applicable to business properties that’s been declared for depreciation claims
Should the property intended for sale be any of these criteria, it’s defined as a normal asset and not a capital asset.
Capital Gain Laws in Different Countries
Capital gains laws isn’t the same in different countries. What could be the norm in America, may not apply in the Philippines.
Frequently Asked Questions
Q1: Am I Applicable To This Tax?
To reiterate, should the property that’s been sold not meet any of the previously mentioned conditions, it’s automatically evaluated as a capital asset. This encompasses properties that fall in the pacto de retro sales category and multiple conditional sales.
Q2: What Is A Pacto De Retro Sale?
A pacto de retro sale is categorized as when a seller is allowed to repurchase a property that’s being sold to them. This is practiced to allow the transfer of an ownership and title of the property to the vendee a retro.
Q3: Is There A Way To Avoid Capital Gains Tax?
As with most things in life, there are often exceptions to the rule. People who are selling their properties in order to acquire or construct a new home are exempted from this rule, so long as there can ensure that the proceeds go towards funding a new property and not be used by other means.
Q4: How to figure out my capital gains tax on mutual funds?
A payable rate of 10% on all possessions applies to your short-term capital gains tax/
Long-term capital gains doesn’t apply to equity mutual funds, as you will have to proclaim income when filing for IT returns. Proceeds from the dealing or transfer of debt mutual or non-equity funds will be subjected to a tax of 20%. Inclusive of indexation interest.
Q5: How do I figure out my capital gains tax on property?
In the event of short-term capital gain, capital gain = accumulative sale price - (transfer cost + house improvement cost + the cost of acquisition). For long-term capital gains, it can be calculated as:
Capital gain = final sale price - (indexed house improvement cost + indexed acquisition cost + transfer fees).
Now that you’ve had a firm grasp on what capital gains tax is, the many terms that may have been unclear from the get go is now easier to understand. From short-term capital gains to tax returns, you’re now armed to tackle the many financial jargons on capital gains tax that may come your way.