ance. We developed-I don't believe there is anything unique about it the same sort of thing many other communities have a massive program aimed at first educating the people in getting them interested to participate in a program of rehabilitation of existing structures. Mrs. DWYER. In rundown districts, sir? Mr. AEX. Yes, but not in districts where the structures have reached slum point where there would be no question but what they had to be torn down. I think it was aimed more at the prevention of slums in future years than the elimination of existing slums. Mrs. DWYER. Have you any housing for the elderly in Rochester? Mr. AEX. Yes. I purposely avoided mentioning that because as you can see from what I have said, my principal interest in being here was to talk with you about the central business districts of cities. But we have an unbelievably successful program of housing for the aged. We have something like 500 units in use now in Rochester that were built by private enterprise which provided the leadership. But in no case could it have been done without the cooperation of local governments. For example, our first project for the elderly involved the municipality, giving for a token of $1 a piece of land to a private development corporation that then went ahead and developed the housing project for the elderly on it. This idea has moved progressively from one location to another, and we have just recently dedicated and opened a high-rise apartment with 200-odd apartments in it for senior citizens. Mrs. DWYER. What is the rental cost? Mr. AEx. Low rents. The rents vary from project to project. I don't have them immediately available but I can put them into the record for you. Mrs. DWYER. Does it compare with the Federal programs for housing for the elderly in cost? Mr. AEX. Fairly well, I would say. This is the same Mrs. DWYER. It is higher? Mr. AEx. I would say it is a little bit higher. But it is not noncomparable by any means. Mrs. DWYER. Thank you. Mr. RAINS. Mr. McDade? Mr. McDADE. I would like to compliment the witness on presenting us what is a very exciting story. I want to make one comment. I was very much interested in the colloquy between the witness and the chairman and it seems to me that perhaps all of us ought to study it in view of the experience of both gentlemen in dealing with the problem of downtown renewal. It is my recollection that when we were in New York, the full Banking and Currency Committee, we found out that the New York Stock Exchange was going to move because of an urban renewal project that was going to take place in Lower Manhattan and I am interested in your comments about the ability of private enterprise to finance these things. I certainly think the New York Stock Exchange could finance its own project, and together with anybody else that might be involved, in any urban commercial renewal. But the chairman brought up an interesting point, and that is, how you acquire property. Apparently in Rochester it was all done through private negotiation. Mr. AEX. Yes, but it was difficult, admittedly. Mr. MCDADE. Would you say then that as another recommendation, perhaps in considering, and looking at the question of downtown renewal, that looking toward the possibility of having private enterprise do commercial urban renewal and not the Federal Government, you would still have to have as a weapon, the right of eminent domain, either vested in the local public body or with whoever might be involved in it? Mr. AEX. Well, discretion would probably dictate that I shouldn't say this, but I have never been one to think and not speak, and I am telling you very frankly I think that we will see the day when, in order to rebuild the central business districts of cities, that somehow or another, with all the proper safeguards, the right of eminent domain will come into the picture. But at the minute, under our present system, how you can have condemnation on behalf of private interests, is, of course, the big stumbling block. But if you could somehow figure out a way that you could get these proposals right up there on the top of the table so that everybody could see them and you could have competition, that would be helpful. And when a property is deemed to be in the public interest and it has to be, before you can use condemnation-I think we will see the day that we will be somehow or another getting around to that problem and condemnation will come into the picture. It is a rather delicate area, but in the meantime there are some things I believe, and I have mentioned two of them that can be done to make it easier to negotiate for the purchase of deteriorated property. The irony of this whole business is, and I have seen this so many, many times in my experience in Government, it seems that the worse slumthe worse the slum the higher the income-producing factor is for the property involved. In other words, where they overloaded property such as a single-family house, and because the income factor is in the final analysis the thing that tags the price, the paradox is that the more deteriorated the property, the higher goes the price and so you have this difficulty. Mr. McDADE. It is a vicious circle? Mr. AEX. It sure is. Mr. WIDNALL. Will the gentleman yield? Mr. McDADE. Yes. Mr. WIDNALL. Is there not a difference in taxation where your capital gain is involved as between the sale to Government under eminent domain and the sale to an individual through private negotiation? Is there not an advantage taxwise to sell to the Government? Mr. AEX. There is an advantage in having the Government take the property from you by condemnation, and I suppose this is what I had in the back of my mind. It is ironic, but if, as I understand it, if a person has his or her property taken away by condemnation in a legal way, he does not pay the capital gains tax on it. I believe he has to reinvest within 1 year or then he does pay the capital gains tax. Mr. RAINS. I am not a tax expert. I have just gotten through with one where they took a lot of farmland for a reservoir. That has to do with a period of 12 months, but I think it relates only to a home. I do not think it relates to a business. We can find that out. Mr. WIDNALL. We ought to put in the record what it is. Mr. RAINS. We will ask some tax expert on the Ways and Means Committee if there is a difference in the payment of taxes where property is condemned by the Federal Government or where it is sold in the ordinary market. We ought to get it from somebody who knows. I do not really know. Mr. WIDNALL. I am not sure. Mr. Aɛx. I may suggest respectfully that that is a very important inquiry. Mr. RAINS. We will be glad to put it in the record. (The information referred to follows:) [Excerpts from "How the Federal Income Tax Applies to Condemnations of Private Property for Public Use," U.S. Treasury Department, Internal Revenue Service, Document No. 5383 (12-63)] POSTPONEMENT OF TAX ON GAIN If you realize a gain from disposition of your property (or a part of it) under condemnation, or under threat or imminence of condemnation, you may elect not to include the gain in the computation of your income in your tax return for the year the gain is realized, and thus postpone the tax on the gain. To do this, you must purchase, within a specified replacement period, either replacement property or the controlling interest in a corporation owning such property, the cost of which must equal or exceed the net condemnation award from your old property. Controlling interest in a corporation, as used here, means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation. For the kind of replacement property required and the time allowed for the replacement, see Replacement Property and Replacement Period, on pages 10 and 11. If the replacement property costs less than the net condemnation award you received, gain must be included in income to the extent of the unexpended portion. Example 1: Your residential property was condemned under State power of eminent domain, and the State awarded you $16.000 for the property, which had a basis of $15.500 in your hands. You realized a gain of $500 from the condemnation. If you purchase another residence for $16.000 or more within the specified time, you may elect to postpone tax on the gain, since your gain will have been entirely reinvested in your new home. Example 2: Assume the same facts as in the above example, except that you purchased a new residence, within the specified time limit, at a cost of only $15.800. Of the $500 gain you realized ($16.000 less $15.500), you are required to report in your income only $200, the part of the gain not invested in your new residence. If you had purchased a new residence for $15.000, you would be required to report the entire gain of $500, since the unexpended portion of the net condemnation award would be more than your gain. Example 3: You owned property you used in your business which was condemned by the State and you received $200,000 as a condemnation award for the property. Your adjusted basis for the property is $175,000. You were not able to find suitable property to replace the property condemned, and you purchased for $200,000 over 80 percent of the stock of a corporation which owns property similar or related in service or use to your property which was condemned. If you purchased the stock within the specified replacement period the tests of control explained above are met, and you may elect to postpone tax on the $25,000 gain you realized on the condemnation. Personal residence A loss on the condemnation (or sale or exchange under threat or imminence thereof) of your personal residence is never deductible. A gain on such a trans action may be accounted for in either of two ways. You may (1) elect to account for the gain as explained in this pamphlet, or you may (2) elect to treat its disposition as a voluntary sale or exchange rather than as an involuntary conversion, and the rules in this pamphlet will not apply. The election under (2) must be made in a statement attached to your return for the year in which you disposed of your residence, and that election cannot be revoked. The statement should indicate that you are electing to treat the disposition of your old residence as a sale or exchange rather than as an involuntary conversion and should contain the following information: (1) Basis of your old residence; (2) Date of disposition; (3) Adjusted sale price of old residence (or net condemnation award received); (4) Purchase price, purchase date, and date of occupancy of your new residence (if you occupied it before or at the time you made the election). Replacement period is determining factor.-Under either treatment, you must replace the residence disposed of with another residence within a specified period of time before or after the disposition, in order to postpone tax on any gain realized. The following examples illustrate the difference between the replacement period allowed under the rules explained in this pamphlet and the replacement period allowed if you elect to treat the involuntary conversion as a voluntary sale or exchange. For complete information regarding the manner of postponing tax on the gain from a voluntary sale or exchange of your residence, see IRS Document No. 5017. Selling Your Home, which may be obtained free of charge from your district director of internal revenue. Example 1: You use the calendar year for filing your tax return. On September 16, 1963, under threat of condemnation, you sold your residence at a gain. If you want to postpone tax on that gain, you must acquire another residence as replacement property. Under the election to postpone tax on gain discussed in this pamphlet, you must purchase the replacement residence on or before December 31, 1964. If you wish to elect to treat your September 16, 1963, sale under threat of condemnation as a voluntary sale or exchange, the rules in IRS Document No. 5017 will apply. In such a case you must purchase and occupy the replacement residence on or before September 15, 1964. However, if you build (rather than buy) the replacement residence, you have until March 15, 1965, to complete it and occupy it under the rules in Document No. 5017. A member of the Armed Forces may be allowed even more time for replacing his residence under the rules for a voluntary sale or exchange. Example 2: You purchase a new residence in January with the intention of selling the home in which you live. You are still living in your old residence in June when you are notified that it has been condemned for use in connection with a new highway project. If you realize a gain on that condemnation, you cannot postpone tax on it (by treating your new residence as replacement property) under the election described in this pamphlet, because the replacement residence was acquired before you received notice of the condemnation proceedings (see Replacement Period, p. 11). However, you may elect to treat the disposition of your old residence as a voluntary sale and the rules for postpone of tax on gain described in Document No. 5017 will apply. Since the replacement period described in that document also includes the year before the date of sale, the tax on the gain will be postponed. REPLACEMENT PROPERTY When you receive money or other property, such as State bonds, for your property which was condemned or disposed of under threat or imminence of condemnation, you must ordinarily report the gain on the transaction, unless you acquire replacement property, the cost of which equals or exceeds the proceeds (net condemnation award) you received for the old property, within the required replacement period. Reimbursement in kind This pamphlet does not cover reimbursements in the form of property other than money or its equivalent. For example, if the condemning authority gives you another piece of real estate, in lieu of money for your condemned real estate, the rules in this pamphlet do not apply. These are rare situations. If you have such a problem you should seek advice from your district director. Replacement property is property you must purchase for the specific purpose of replacing the property which was condemned or disposed of under threat or imminence of condemnation. It must be property similar or related in service or use to the property which it replaces unless your property which was acquired by the condemning authority was real property used in business or for rental or investment, as explained below. Similar or related in service or use means that the property acquired must be functionally the same as the property converted. Thus, a business vehicle must be replaced with a business vehicle and the replacement must perform the same function. Example: Your personal residence is condemned by local authorities for use in a public improvement project, and you receive a condemnation award resulting in a gain. In order to postpone tax on the gain, you must purchase another personal residence, the cost of which must equal or exceed the net condemnation award from the old property. If you invest in an apartment house, or in a single family dwelling that you rent out, you may not elect to postpone tax on the gain, regardless of the cost of the new property. You may acquire controlling interest in a corporation owning property which is similar or related in service or use to the property involuntarily converted. The cost of such property must equal or exceed the proceeds from the old property, and your acquisition of the stock will be considered acquisition of replacement property. Controlling interest, as here used, means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation. Property or stock acquired by gift or inheritance does not qualify. You must purchase the property or stock which you acquire as replacement property. The identical proceeds you received from the old property do not have to be used to acquire the replacement property. Proceeds means money plus the value of dissimilar property received less expenses incurred in obtaining them. Any part of the proceeds used to pay off the mortgage or other liens on the old property does not reduce the proceeds received. Neither are they expenses, nor investments in replacement property. Leaseholds If you received an award in consideration of a lease which you gave up in a condemnation of private property for public use (or under threat of such condemnation), you may elect to postpone tax on the gain you realized if you purchase replacement property within the required replacement period. You will be considered to have purchased replacement property if you purchase a leasehold similar or related in service or use to the lease you gave up. Entering into a lease, in contrast to an actual purchase of a leasehold, does not qualify. In some cases, construction of new buildings on land you own (or acquire after the condemnation), which are used to carry on the same business as that for which the old leasehold was used, will qualify as replacement property. Example: You leased improved real property which you used in your business of manufacturing machine parts. The property was condemned for public use and the public authority awarded you $50,000 as damages for the loss of your lease. You were not able to locate other improved real property suitable for use in your business, and you purchased unimproved land and constructed new buildings thereon which you used to carry on the same business of manufacturing machine parts. The land and buildings cost you $50,000. The new land and buildings qualify as replacement property. If you had invested part of the proceeds from the condemnation in machinery, the machinery would not have qualified as replacement property. Real property used in business or for rental or investment Special rules apply to the replacement of real property used in your trade or business, or held for the production of income or for investment. If such condemned property is replaced, within the replacement period, by other real property which may be used in your trade or business or held for the production of income or for investment, the tax on the gain may be postponed as described above even though the property is not similar or related in service or use to the property converted. It does not matter whether the property you gave up, or the property you acquired, is improved or unimproved real property. The ac quisition of a controlling interest in a corporation owning such property will not be considered the acquisition of replacement property in such case, however. |