00:53 - Source: CNN
Donald Trump: Tax rate is 'none of your business'

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Robert McIntyre: Donald Trump could be writing off millions of dollars

Trump's example spotlights the need for real estate tax reform, he says

Editor’s Note: Robert McIntyre is the director of Citizens for Tax Justice, a progressive research and advocacy organization focusing on federal tax policies and corporate tax issues. The opinions expressed in this commentary are his.

CNN  — 

Until Donald Trump releases his tax returns – which he has steadfastly refused to do after first promising he would – any statements about his net worth, annual income and tax rate are speculative. Still, if we combine what we know about tax loopholes for real estate investors with Trump’s limited financial disclosures and other publicly available information, it is reasonable to surmise, as does expert and Pulitzer Prize-winner David Cay Johnston, that the presumptive Republican presidential contender is paying very little in federal income taxes.

Robert McIntyre

We know that Trump has repeatedly received a New York state tax break intended only for families earning less than $500,000 per year. And a CNN investigative piece about Trump and his golf courses demonstrates further that the reality TV star is adept at using legal maneuvers to get unreasonably low real estate valuations, ensuring he pays minimal property tax

For example, according to the investigation, he owns a golf course in Westchester, New York (where he gave a post-primary speech not too long ago), that he claims in FEC statements is worth $50 million. But his attorney has filed appeals claiming the property is only worth $1.4 million. Similarly, he has filed hundreds of property assessment appeals regarding multi-million dollar holdings in other states.

But the most incriminating information we know due to court filings is, for two years in the late 1970s, Trump paid zilch in federal taxes due to a tax code provision that allows real estate investors to write off depreciation even when it’s a cost they never paid. Based on this and his other tax avoidance schemes, it’s hardly a stretch to presume he would continue to exploit all available loopholes.

02:50 - Source: CNN
Does Trump devalue golf properties to avoid taxes?

Private real estate investors can write off depreciation costs even when the vast majority of their project is debt-financed. What does this mean? Let’s say a private real estate developer builds a rental property that costs $100 million, but he only puts down 10 percent or $10 million of his own money, and finances the remaining $90 million with a 5 percent loan from a bank or investors. Then, let’s suppose the annual rent payments minus expenses for maintenance generate $5 million a year before interest. Annual interest on the property would be $4.5 million, leaving a net cash flow of $0.5 million.

For tax purposes, however, the developer can take depreciation deductions over a period ranging from 27 to 40 years, depending on the type of property, for the full $100 million value of the property, which will produce a tax write off of $2.3 to $3.6 million a year. So our faulty tax code gives the owner an annual tax “loss” of as much as $3.6 million. To top it off, the owner can claim this tax-deductible, so-called loss even if the property value is actually going up. This is because depreciation deductions are based on the entire value of the property, not simply the cash that the investor put down.

Looked at another way, over just three or four years, the building owner will have written off his entire $10 million cash investment. Then as the years go by, he can continue to write off that investment again and again.

The bottom line is that the tax code enables real estate developers like Donald Trump to transform an investment earning a 5% annual return before taxes into one making 18% a year after taxes. In other words, most of the profits are a gift from the government. This is what economists call a negative tax rate, and what we ordinary people would call welfare for the rich.

02:46 - Source: CNN
Checking Trump's argument against releasing his taxes (2016)

Because developers are real estate professionals, they can use their alleged tax losses from property holdings to offset income from other sources. In Trump’s case, the core of his business involves real estate, but he also receives income from other endeavors, including television appearances, Trump cologne (yes, there is such a thing), book royalties, golf courses, get-rich-quick seminars and so forth. Trump’s so-called tax losses from real estate ventures can legally be used to offset his profits from each of these unrelated sources.

In theory, the tax code should provide a partial offset to these subsidies by taxing developers once they sell their properties. But there’s still another big loophole that prevents this from happening. The law allows people in the real estate business to avoid ever selling their properties for tax purposes. Instead, they can trade one property for another through something called “like-kind exchanges.” This tax break was enacted long ago to let family farmers trade fields with other farmers without triggering capital gains taxes. But like so many other small loopholes, this one has morphed into a huge tax break for real estate moguls.

02:19 - Source: CNN
Clinton video questions Trump's tax motives

Given their widespread use in the real estate industry and Trump’s own suggestion that he pursues the “lowest tax rate possible,” it seems likely that Trump’s tax returns would show that he has taken extensive advantage of ridiculously large depreciation breaks and the like-kind exchange loophole.

Regardless of the exact details of Trump’s tax shenanigans, Congress should put a stop to tax breaks for real estate magnates. Depreciation deductions should be limited to a percentage of the owner’s equity. The debt-financed part should not qualify for tax deductions. Second, lawmakers should eliminate the like-kind exchange loophole.

Together, these reforms would not only raise large amounts of much-needed federal revenue, but they would also help ensure that real-estate developers are paying their fair share in taxes.

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Robert McIntyre is the director of Citizens for Tax Justice, a progressive research and advocacy organization focusing on federal tax policies and corporate tax issues. The opinions expressed in this commentary are his.