Real Estate Loopholes
Posted: October 14, 2016
The revelation that Donald Trump lost nearly $1 billion in 1995 is reason to question whether it would be a good thing if he ran America like he ran his businesses. It is even a better reason to question the tax code that can allow billionaires to pay less than teachers, secretaries and firefighters.
Breaks for the well-off are widespread. Nowhere is this truer than in the real estate industry, where loopholes are so generous that the average tax effect rate is just 1.3 percent. That's the third lowest rate among 95 industries studied by New York Universities Stern School of Business.
For starters, commercial real estate holders can write off all their interest expenses. This is not unique to real estate, but its benefits are concentrated in real estate and banking because other industries rely on much less debt. It's an overly generous provision that not only comforts the comfortable, but also contributes to real estate and banking bubbles.
According to others who oppose real estate's being vital to the economy, the Real Estate Roundtable, a non-partisan group focusing on issues affecting our industry, has long maintained that all business investments, including real estate, should be taxed on the economics of the investment. Tax incentives should be rare and limited to situations justified by market failures or societal goals.
Capital investment by America's businesses stimulate jobs and economic activity. Tax laws allows, through depreciation and amortization, the recovery of capital investment investment costs. Just, as airlines depreciate aircraft, technology companies amortize research and development and manufacturers depreciate plants and equipment, real estate owners depreciate buildings.
Buildings depreciate from wear and tear, and because they grow technologically and functionally obsolete. According to the Massachusetts Institute of Technology, buildings depreciate twice as fast as today's tax law permits. In contrast, underlying land often appreciates, reflecting inflation and demographic trends.
Sometimes businesses suffer losses that exceed income and rather than say "tough luck", the tax law allows losses to be carried forward to future tax years. Public corporations histrorically have the largest-loss carry forward.
I don't know about you, but I think Donald Trump's sham with the IRS should not be permitted. People with the craziest provisions allow people in the industry to depreciate the value of their properties. Again, this is not to unique to real estate, but it is particularly beneficial to people in that line of work.