WASHINGTON (AP) — Big real estate developers like Donald Trump have long benefited from a myriad of legal loopholes and breaks that can shrink their tax bills. Their advantages expanded further with the federal tax overhaul that took effect this year.
Even before the new tax law, the U.S. tax code provided loopholes and special breaks that favor wealthy real estate investors. Tax experts say they're often able to claim losses more quickly and easily than other taxpayers. They are also afforded several ways of delaying or avoiding reporting profits to the Internal Revenue Service.
They can fall behind on their debts and still face fewer tax penalties for having the debt forgiven than other kinds of investors, according to Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy. Trump took advantage of that, Wamhoff says, when he couldn't repay debts on his Atlantic City casinos in the 1990s and early 2000s.
Wealthy families typically try to transfer some of their assets during their lifetime to ease the tax burden on their heirs. There are a number of ways to do so legally. As assets go, real estate is one of the most flexible options.
That's in part because the U.S. has a long history of property ownership and related tax law, says Anne-Marie Rhodes, a professor at Loyola University Chicago School of Law. As real estate holdings have gotten more complex in recent years, so have applications of the law.
There's a fine line between tax avoidance and abuse.
"Real estate types are aggressive ... but the tax code has kind of encouraged it," Rhodes said in an interview. "If you look at taxes and credits and benefits, it's only rivaled by oil and gas interests. That is because they have lobbies that are effective."
As president, Trump touted the new tax legislation as fulfilling a key campaign promise to help the middle class. Trump and Republican lawmakers insisted the $1.5 trillion tax-cutting package would benefit middle-class Americans — not the wealthy.
"I think there's very little benefit for people of wealth," Trump said last fall. "This is going to cost me a fortune."
But a key provision delivered a steep tax break for a kind of business set up by owners of profitable firms, including Trump and his family. The law allowed a 20 percent deduction against income taxes for businesses whose profits are taxed at the owners' personal income rate. They're known as "pass-through" companies because their profits are funneled into the owner's personal tax bucket. Those businesses span a huge range, from the local florist and family-owned restaurant to law firms, hedge funds and privately held large firms — such as real estate companies and the Trump family's property empire.
Trump himself has owned about 500 entities structured as pass-throughs, according to his lawyers, making the Trump Organization less a single business than a grab-bag of units drawing on the fancier parts of the tax code: sole proprietorships and limited-liability partnerships.
The legislation's tax break for "pass-throughs" was a sweet deal for real estate moguls and landlords as it passed the House of Representatives.
But the story didn't end there. The Senate's version clamped in a restriction on taking the new "pass-through" deduction. Only businesses that pay substantial wages to employees, compared with the amounts they spend on equipment or property, would qualify. Real estate developers tend to have relatively few employees — and hefty capital investment in buildings that generate rent.
Senate GOP leaders changed that in late-stage negotiations. They added a provision to the final bill that allows real estate companies to get around the restriction, by using a formula that takes into account the amount paid for property as well as wages.
Another boon for real estate developers came in the new tax law's treatment of "like-kind exchanges." The exchanges, especially favored by real estate investors, allow a property owner to defer paying tax on property if — rather than selling it — they exchange it for a similar property.
The law interprets that broadly. An office building can be exchanged for a warehouse or an apartment complex, for example. The new tax law eliminated the like-kind favorable tax treatment for exchanges of personal property — but preserved it for real estate.
Using the long-standing allowances in the tax code, property is often handed over within a family. These can be legitimate transactions, but they hinge on how the assets are valued. If the valuation is compromised, it could cross the line into illegal conduct. That may have happened in some cases with the Trump family, a new report by The New York Times suggests. A lawyer for Trump has disputed the Times' findings of possible tax fraud or evasion and said that parts of the report are "extremely inaccurate."
While there are tax laws governing valuations, the Internal Revenue Service lacks the resources to verify the information in every case, said Bridget Crawford, a law professor at Pace University.
Crawford maintains Trump's family has been doing this for generations — transferring property for a stunningly low value that has never been questioned. For some less wealthy families, it may not even have occurred to them that they're required to pay a tax on the transfer of a family home, and the law is rarely enforced, Crawford said. It is illegal to skirt the law willingly and knowingly, and if an attorney or CPA advises a client to do so, they are violating their professional ethics.
Crawford cautions: "It's not just a problem for the Trump family, it's trouble for all families."
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Sell reported from Portland, Oregon,