income taxes as related to real estate by rex b. goodcell internal revenue

8/14/2019 Income Taxes as Related to Real Estate by Rex B. Goodcell Internal Revenue

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Tl& neatrtABhrc Book of O&l,i,frkia

REx B. GooDcDLLAolbctor Interrntr RetehneSotl h.trr Cdlilornia Di stri.lLos ,hltcles


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The Re( tg BLueBook of Calilorniar 183

Income Tax as Related o Real EstateBv REX B. CooDcELLSale ol "Capital A$ets"-S,tLbdbisions-1itq)ro1)enLelLtsErected blJ Leases-Propertlt Acqaired, Prior to March 1,1913-S&le of Pl operta A.quie(L ba Gilt E$changes.

HERE seemso be a misunderstaDdingr the part of many tax-paye$ relative to the provisionsof the Internal Revnue aws'with respect o IncomeTax in conDection ith the saleof pro!-erty, and, due to this erroneous rterpretation, many salesof propertyin which large amounts are involved are not consllmmatedbecauseofthe fact that taxpaye$ believe the goverDment 1\'ill requirc them topay the major po*ion of the amount leceived as Income Tax-Prior to the enaction of the 1921 ncome Tax Law. the surtax ratesdid apply upon r(ome receivpd rom thesesour..es,re sameas uponallolhar income:however.h uas app|eciaLed y thc $vernment rhrtit was not entirely equitable to tax, in the year of sale, the profitsrealized rom such sale, when the increase in value was probably dis-tributed over a number of years. In older to correct this iniustice.Section206a of lhe JlevpnueAcl ol l92l was enacled.whiah Dro-vidps ha( anJ taxpayer may clecl to be raxadsr 'he fale oI 12,2_percent upon the proft realized from the sale of capital assets, n lieu ofthe regular lates provided by Sections 210 and 211. The tenn"capital assets," as used in the above section, means property ac-quired and hld by the taxpayer for profit or investment for morethan two yeaN, but does not include property held for' personal use orconsumptioDo{ the taxpayer.It will be seen from the above that the govemment does not taleas Internal Revenue taxes the major portion of the profits; and ifthis new provision of the Income Tax larv is tholoughly explained toyour clints, it is believed the larger sales involving large amountsof profit will be more easily closed. (See Art. 1651-Regulations 62).I t has alsobepn roughl lo my arlert ion upon numarous ..asions,by auditom in my office, that there seemed o be a qeneral misunder-standing f Ihc appli .at ion o[ (he lnternal Rc\erutLaws felarinE oprof irs ealized rom the saleof property. Pf ior to lhe decision len-dercdby the Supreme Coult, holding that profits from such sales didrcpresent taxable income, many persons were under the efrcneousimprcssion hat no income was realized from the sale of caDital assets.Theprof i l f ro 'n rhe sal p ol rhe propert) const irutes np;f {he .hielsources f income to our taxpayers, especialty n Southern California.and every deal"r. jn rpal esral" sl-ould nfo|rn himself ur rhe mairpmvisiorN of the Internal Revenue laws in this reEar.al.Every saleor transfpr o[ reel esiate madeby a raxpayer shouldbe itemized upon his income tax return for the year in which thesaleor transfer was consummated. Any profit realized fi.om such sale


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184 Tke Eea,ltaBl,ueBoolr of Cal,iforrui)0,is subject o income ax; and in the caseof propedy acquireal ubse.quentto March l. 1913, he taxabte ncome s tie ain"""nce telw"enHih"",",l""l$lJ-n"

**" price leceivpd, ess any cxpensesn connectionThere is also to be taken into consideration depreciation sus_{,ainedon_the improvementssold in connection ll t tt" ri"r"ii".ueprecratlon s allowedas a deductible xpense, y the Inteinai Re;_enue Bureau,upon all propefty used n ionneclionrnitt . irra" ""uslness, nd wherein mplovementssuchas olfice buildinqs.aDalt_ment housea r improvemcnlsuponrental propedy are used n con_]rFcuonwlth ltretaxpayer's radeor business depreciation llowancels aUowed s pelmissibje eduction n computing he taxDavedsnet income for each year. The rate of aepreiiation is l'aseUu.pon the physical life ot the improvementsupon the proDertv.

upon rhpsaleoI tnls property,this deprecialioDs to be restorehandraKen nto conslcterationn computinghe profit or loss rom the sale.anq Iends1o ciucehe.ost of the property. This depreciations sus_[arneq egarcuess I whetheror not the taxpayerdeductshis amountrn nrs ncome ax retuTns or prioT yearc.Many q-uFstionsre alsoaakeda; to whefheror not the taxDavercan add to his cost taxes and inrerestct""ge" f* prio"-v"u'rii-duimanypersons,n computing ,heirpro6uor loss,endeivorti add suchamounls o the costof the propeny, This is alsoan er.roneous ro_cedure..nasmuch s laxesand inlerest are an allowabledealuciionupon he.taxpayer'seturn [orrhe ycar in whichpaid or accrueal.rnqurnes n targenumbershavealsobeen eceived v the DeDart_men!,rn connectionwith property sold upon the installinentnlan orwrrn res-peclo sales nvolving deferredpalanents, Whenproiertv issord,andonly a relativetysmall nilial payment s rnade. ener; y jessthanone-fourthof thc saleprice,and the balance f the payments reorslrrbuteoover a number of years, then the laxpayer mav elect opay.rncomeax upon he propodionaleparl of the DrofiL e;resenle.lln ute amountreceLveda(hyear. ll the initial pal,,rnentis larce.gneraflymore than one-folrrthof the saleprice, and the bala[ce;frne paymentsaTemacleovet a short peliod of Lime,and securedbv amongage or olhcr secunly, the taxcs are due upon ihe total Dr;fitreanzedrom Uratsate n the year in whi.h it is made." .rne i;wo metnodsoI reportjng transacrions f this najure are vervrul ly covpled n ArrrclFs 4.45 and 46of Regulajions2.SUB-DIVISIONS. .Any person ontemplatingub-dividing tract of lanal ndsel l_mg l]le.satne n lots should amiliarize himielf wir,l Ure ncome -axrgutarlons, anrcutartyArl icle 43 of Reg'Lllalon 62, \MhichDrovidesrnar cosr.anclolher expenscsn connectionMithsub_division,hallbeallocatd o pachindividuat touand the profil reportpd D;; th;;"i;or.eacn tor. treat rlg such as a separate ransa(tion. It is not per_mrssrofll: repo'"t l1egain or toss realized rom the saleof the tractIMPROWMENTS MECT}TD BY LESSEEWlen buildingsare erectedor improvementsmadl!by a lesseenpursuance t an agreement il,h the lessor, nd suchbuildinqsor im_provementaare not subject to removal by th" t"sse", tt " l"s"o?Injv'ri


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I:TheReal,tA LueBoohof Calilonrirrhis option report the income helefrom upon eithel of the followingDases: (a) "The lessormay report as ncomeat the time whensuch buildings or improvementsale completed he fairmarket value of such buildingsor improvements ubject othe lease. This amount would ordina ly be the differencebetweenhe valueof the land free from the leasewithoutsuch mprovements Dd he valueof the land subject o thelpasewilh such mplovemenls.(b) "The lessormay spreadover the life ol the lease heestimateddepreciated alue of such buildings or. mprove-meDtsat the temination of the leaseand repor.tas incomefor eachyear of the leasean aliquotpaft thereof."For a full explanationof imDr'ovementsv lessee.eeArticle 48of Rgulations62.

PROPER,TYCQUIREDPRIORTO MAR,CII 1, 1913In computinggain and derluctibleoss upon he saleor exchangeof propertyacquired rjor lo March1, 1913, olh the originalcoirandLhe air markeL al ueas oI March , 1913. re nk pn nio consid-eration. The examples r the following tabie vrill give a bdef sum-mary of the amount o be repoltedor of the amount hat mav be d+.ducted sa loss. (FoI full explanctioneeAl1icle1561- RegLrlalions62.) To avoid complexity no adjustment has been made in theseexamplesor depreciationor depletion.: ' F " ' . M . * " 1Cost lvalue March Sale Price

| 1 , 1 9 1 310t000 F15.0,00 $20,{r00 $5,0'00 Tarabre Cain.Excess or amount realized oyerfair barket valDe as of March 1,1913. Gain attributable to tieDeriod prior to March 1, 1913,1 0 , 0 0 0

1 0 , 0 0 0]

10,000

10,000

1 0 , 0 0 0

5 , 0 0

30,r'00 20too0

5 , 0 0 0

20 . 0 0

!2,000 Deduclible l-oss.E\cess of fair market value oyeraDroDtrt ealizeil Loss attrtbutabloto the perioil ldor to Narcl 1,1913, o t deduc l ib le .No taxaDle sain or denucttble loss.Re*o!: A gain on vhole lrans-action, which gain is attrlbrlablelo peliod trior io trIarch 1, 1913.No tdxable sair or deductibleReasoD: ,{ loss otr whole traDsa.tion whi.h loss is atirlbutabreto leriod prior to March 1, 1913.$10,000 Ta\ab le Gain.Reason: Gain on whole t.arsac-tton, all ot rich ls attrllutableto L'eriod subsequent to March 1,1 9 1 3 ,$5,00o-Deductible LoBs.Reaon: l-o$ oD whole traDsac-tion, all of vhich is attribubbrto leriorl strbsequelt to March 1,1913. Only acturl loss sustained

I 5 , 0 0 0


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186 The Ree,l,ta LueBook ol Cal,ifominSAI,E OF PROPTRTYYACQUIR,EDBY GII-]This ofice also eceivedmany nquiriesas o the amountof proitto be repolteal upon propedy acquired by gift. The 1921 law also

made changes reletive to computing gain or loss from property soacquired, the changebeing that upon propelty acquired by gift afterDecember 1, 1920,he gain or loss s to be the difference etweenhecost (or March 1, 1913,value) to the alonor, r the last precedingownr by whom it was not acquirealby gift, anal he a.rnount eceivedtherefor. Inasmuch as this is a change from t}Ie provisions made bythe 1918RevenueLaw, all dealersshouldacquaint hemselveswithArticle 1562of Regulations62, for information relative to taxablegain upon property acquired by gift.EXCHANCEOF PROPERTYWHICH RESULTSN NO CAIN ORLOSS

Where property held for investment is exchanged or other prop-erty of a like lind, or wherepropertyheldfor prodluctiv se n tradeor businesss exchangedor other property of a like use,no gain orloss is recognized. Under these provisions, no gain or loss is recog-nized by one other than the dealer from the exchanqe of reel estaiefor real estatenor for lhe exchangeof evidencesof indebtedness,suchas bonds or notes,for evidencesof inalebtedness.Any lroductivereal estate held by one other than the dealer for future use or futurerealizationof the increment n value, s held for investmentand notprimarily for sale, under the Intemal Revenue resulations. For fullexplanationf tha rpgrlat ions n exchangesf property, eeArl ic le1566,Regulations62.Where prope.ty such as that above described is exchansed forother proparly, and no gain or loss s recogrized. he prcp;rty re-ceivedshall, for the purposeof determininggain or loss oi its sub-sequent ale,be treated as aking the placeof the property exchangedtherefor. (SeeArhcle1567of Regulations 2).Particular attention is invited to the provisionsrelating to theexchange f propp y s',ilhoutgainor lossbeingreporled,viz. that theexchangemusi be a {rade of propefly Jor other property; whereinproperty s exchangedor propeny, togetherwilh money,othpr pro-visionsof the Iniemal Revcnlre aw $rill apply.

In cases 'heremoneyor othersecurities re receivedn exchansewilh olher real properry, r is suggested.Iat the taxpayerobtainlruling upon he individual transaction.or that he familisrize himselfwith A*icle 1568of the Resulations.The Internal Revenueoffiie s open rom 8:30 A. M. to 4:BOp. M.,and t is our desire o assist he taxpaying ublicof SouthpmCal-jfomia to jhe ful lestexlenl. You are cordially nvircd o call at theoffice n the Federal Building and submit your problems n person,or to address our quFsl,ionsy ielicr, and every endpavorwill bpmade o explain ul ly the provisiohs f the Intemal Revenue awand Regulalions.Copies f Regllations62 may be obiainedupon equestby calliDgat Room.300 Federal Building. tos Angelei. during the hourimenltonedabove_


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income taxes as related to real estate by rex b. goodcell internal revenue

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