Placeholder while loading article actions

Donald Trump could have avoided paying taxes on up to $916 million in income over an 18-year period, according to documents published by The New York Times over the weekend. The number is sensational, but the Republican presidential candidate would be far from the only real estate mogul finding ways to exploit the rules to cancel tax bills.

According to data compiled by New York University professor Aswath Damodaran, the average real estate development company pays just over 1% of its revenue in taxes. The average for all industries in the Damodaran database is almost 11%.

Trump could have charged the $916 million loss against future income, reducing the amount he would have had to pay taxes on. Yet even without this catastrophic loss, Trump could have had a series of maneuvers as a real estate developer that could have limited, if not eliminated, the taxes he owed the government.

Trump could have used a dubious tactic called “equity-for-debt swap” to avoid paying taxes. Here’s how it works (Video: Daron Taylor/The Washington Post)

Many developers are able to make money year after year on their projects without paying taxes on those earnings, said Lester Weingarten, an accountant and partner at Gettry Marcus in New York. That’s even without the benefit of a loss like the one Trump claimed in 1995.

Why Thousands of Millionaires Don’t Pay Federal Income Tax

Tax authorities allow developers to subtract the cost of acquiring a new property from their income over a fixed number of years, a process known as depreciation. In principle, depreciation represents the depreciation in value of the original investment due to wear and tear, but in practice the value of real estate investments often increases even as they depreciate on paper.

“Generally speaking, depreciation has nothing to do with the actual decrease in value,” Weingarten said.

In any given year, a developer may make money renting the property but report losses to the Internal Revenue Service because subtracting depreciation costs reduces revenue below zero.

Usually, if an investment increases in value instead of depreciating, the investor will pay taxes on the increase in wealth once they sell the asset. Property developers, however, are often able to sell one property for a profit and buy another without paying taxes on the gains, a process that can be repeated over and over again.

Developers can expand their assets and annual income, deferring taxes as their wealth accumulates. In some cases, if a developer dies before paying, the winnings will never be taxed.

The most shocking part of Donald Trump’s tax records isn’t the $916 million loss everyone is talking about

Similar rules do not apply to shares, for example. When investors make money by selling stocks, they generally cannot avoid paying taxes on the gain, even if they put the money back in the market.

Meanwhile, real estate companies typically borrow large sums to finance their projects, and borrowers receive favorable treatment from the corporate tax system. They can also deduct the cost of interest from their income each year, a benefit that is not available to companies that finance their investments by paying up front.

These exemptions make economic sense, said Kyle Pomerleau, director of federal projects at the nonpartisan Tax Foundation in Washington. The fact that developers can swap one property for another encourages them to keep investing, he said, which benefits the economy as a whole. He also pointed out that banks pay taxes on the interest they receive from home loans, and he argued that there was no reason to tax the money twice.

These exemptions are also available to companies in other sectors, but the real estate sector benefits more due to its heavy reliance on debt. “The real estate industry is different from other industries,” Pomerleau said.

On the other hand, there are at least a few forms of favorable treatment in the industry that other industries do not enjoy, including one provision in particular that could have allowed Trump to declare such unfathomable losses in 1995.

Most taxpayers can only claim losses as large as their own investment in a business, excluding money provided by lenders. Many real estate investors are exempt from this rule, however, effectively allowing them to deduct the losses of others from their own income.

What the government is doing for people like Donald Trump that it won’t do for the poor

It’s possible that Trump lost $916 million of his own money in the years leading up to 1995, but some of those losses may also have been incurred at the expense of creditors who lent him money. If so, barring the real estate investors, he could only have claimed a loss to the extent that his own money was at stake.

Unless Trump releases more complete tax returns, it will be impossible to know if and how much he benefited from this exception.

“Why does the real estate industry get it and other industries don’t?” said Weingarten, the accountant. “It’s very difficult to explain to a person who earns his salary and pays his taxes.”

A new study indicates that Trump would raise taxes for millions of people. Trump’s campaign insists he won’t.

Why the world’s third richest man is attacking Donald Trump

A strange but accurate predictor of whether someone supports Donald Trump


Real estate developers open offices to retail investors


How property developers can take advantage of solar

Check Also