Evening star., 1938-06-18
CHANGES IN TAX
SYSTEM OUTLINED
Points of Importance to
Real Estate Dealers Are
Explained by Ellis.

IAHioiiICu NY IHIos
Changes made in the taxation Of
capital gains and losses and other pro-
visions of the new Federal Revenue
Act of direct importance to real estate
are outlined by George P. Ellis, COM
troller of the National Association OF
Real Estate Boards and for years its
consultant on income tax matters, in
the mid-June issue Of Freehold, maga-
zine of real estate.
The new tax law, which went into
effect May %. is an entirely new law,
and not series of amendments to the
preceding revenue law, Mr.. Ellis points
out. Also, it is temporary. for it is
ended with the calendar year 1899,
and there is no clause which auto
matically continues the 1888 law in
effect until new tax law is passed.
Clarifying the division set up as
between short term ana long term
holdings in the capital gains tax as
1t applies to individuals, Mr.. Ellis says:
I'm the short-term classification of
gains and losses are those resulting
from sale or exchange of property held
for not more than 18 months. Net
gains in the first instance are tax
able at 100 per cent. If there is a
short-term capital net loss for any
year-that Is, an excess of a short
term taxable loss for the taxable year
over short-term capital gains for the
H,oor-fhn 1Ncc ho taI
from ordinary income, but must be
carried forward and applied against
the short-term capital gains of the
succeeding taxable year.
How Tax Is Computed.
In other words, If short-term losses
are in excess of the short-term gains,
the taxpayer does not benefit through
deduction of the excess loss from net
income and does not have the addi-
tional $4,000 allowed He is allowed
merely the net excess of losses over
gains, to be carried over to the fol-
lowing year.
In the case of a taxpayer other
than corporation, only the following
percentages of the gains or losses are
recognized and are to be taken into
account in computing that income. If
the assets have been held for l8
months or less, 100 per cent of the
income on this basis is taxed If the
assets have been held for more than
l8 months but not more than "a
months, only 66 23 per cent of the
income is taxable If the assets have
been held for more than "a months,
only so per cent is taxable
With regard to long-term capital
gains the rule boils down to this That
II the assets are held for 18 months
or less, the taxpayer pays as upon
ordinary income. If the assets are held
for more than l8 months and less than
"a months, the tax rate is 20 per cent,
and II the assets are held for over "a
months the rate is Is per cent, but
with the proviso regarding long-term
capital gains that if on the basis of
these percentages added to regular
income, the tax would be more than If
paid at regular rates, only the lesser
amount is paid.
With respect to net long-term capi-
tai losses there is an alternative
method of computation, and the higher
tax resulting from the two methods
OF computation must be reported. The
procedure: (a) Compute the tax on
net income after deducting long term
loss in the regular manner (b) Com
pute the tax on the net income in
creased by the long-term capital loss
IN the regular manner, and then re-
duce such partial tax by 80 per cent
tax on the recognized long-term capi-
tai loss-reflecting the net tax liability.
Change Follows Protest.
THE provisions relating to capital
gains and losses of corporations are
unchanged. Capital losses are de-
Quoted to the extent of $4,000, plus
any capital gains. There is new
provision, however, that those assets
which are used in the business and
which are subject to depreciation are
excluded from the capital gains defini-
ton. (This provision does not apply
to real estate held for sale by real
estate concernsD Now if a piece of
equipment or building used in the
business be sold for more than its de-
preciated amount, the gain becomes
part OF ordinary income On the other
hand, If there be net loss, it may be
taken as a deduction like any other
operating expense, and not subjected
to the $4,000 limitation"
Mr.. Ellis details as affecting many
real estate owners and real estate
companies a change made following
protest OF the National Association of
Real Estate Boards against the pos
sibility existing under the 1887 amend
ments that legitimate operating real
estate companies might be subject to
unintentional penalty classification as
personal holding companies.
The possibility of such uninten-
tional tax penalization of bona tide
operating companies came about
through the definition set up for a
personal holding company in the
"loophole plugging" legislation of 1887.
Under this any ordinary company
If held by small group of people
would have been in danger of classi-
fication as personal holding COM
pany" if in any year a small enough
fraction of its income was from
rents" and large enough fraction
was from interest" (The 1887 law
for the first time included rents" as
personal holding company income if
thev constituted less than Sn nor cen+
of the company's gross income)
Operation of the new act, as Mr.. Ellis
outlines it:
Rents. for purposes of personal
holding companies income, include
interest on debts owed the corporation
to the extent that the debts repre-
sent the selling price for which real
estate held primarily for sale to Gus
toners in the ordinary course of its