that, he parlayed the massive loss into opportunity. As the New York Times reported Saturday, the $916 million loss could have allowed him to legally avoid paying any federal income taxes for up to 18 years.
One of the perks of the real estate business is that it lends itself to many tax-avoidance strategies. Here are some of the accounting tools that Trump and other property owners can employ to turn losses into big tax savings.
Net Operating Losses
For many investors, buying income-generating real estate isn’t too different from buying corporate bonds or stocks. But there is one major advantage: losses on rental properties can be deducted from taxable income.
Getting that provision into the tax code was a rocky road. In 1986, Congress passed a law that treated virtually all investments in rental real estate properties as passive investments (much like stocks or bonds). This meant property owners could no longer deduct any operating losses on their properties from their taxable income. In the following years, property prices went into a tailspin. Legislators blamed the 1986 law in part for causing the savings loan crisis by discouraging investment in real estate, according to a 1994 Chicago Tribune report. So they changed the rules again.
Since 1993, rental property owners can deduct operating losses on their properties from their taxable income, provided they spend at least half their working hours and at least 750 hours a year as a real estate professional.
But such operating losses rarely persist in New York’s real estate market, said Kenneth Weissenberg, a partner at accountancy and consulting firm Eisner Amper. Most of his real estate clients use deductions but still end up paying income tax, he said. “Even Leona Helmsley, who went to prison for tax evasion, she still paid income tax,” he added. “Just not enough.”
Depreciation is the most famous and counterintuitive way real estate investors can shrink their tax bill. The IRS treats properties as assets that lose value over time, along with cars, desks and refrigerators. Unlike cars and desks which actually do become less valuable over time due to wear and tear, buildings in New York City and other major metropolitan markets tend to steadily gain value over the years.
Property owners can deduct a certain portion of a property’s value every year until that value reaches zero. For residential rental properties, the typical depreciation period is 27.5 years, according to the IRS’ website.
As useful as depreciation is to property owners, it is a gradual process and rarely generates the kind of loss Trump recorded in 1995. Weissenberg said that, hypothetically, to deduct $916 million due to depreciation, you would need to have a real estate portfolio worth $30B or more.
Cancellation of Debt
Another way developers can drastically lower their annual income tax bill is through a cancellation of debt, or outstanding debt that has been forgiven after negotiations. Typically, this kind of debt forgiveness is treated as income on a tax bill, but current laws allow taxpayers to deduct this debt if it is tied to Chapter 11 bankruptcy (which Trump entities had undergone four times by 1995), or if the taxpayer is insolvent, meaning上海千花网交友