Originally published at: https://boingboing.net/2018/10/13/money-for-nothing.html
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Can i say i am shocked? No, no i cannot say that. Not at all. It makes me sad that i am not shocked, but no, no not at all shocked.
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Didn’t Nikki Haley just call him a national treasure, or something?
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Hang on, tax professional here. EVERY industry is allowed to take depreciation deductions on items purchased with borrowed money. You are liable for the funds, you have borrowed it, it is your money. What you don’t get to take as an expense is the repayment of the loan principle and, if you default on the loan, that loan becomes taxable income (debt forgiveness is a taxable event). Seriously, there is nothing out of the ordinary here.
Net Operating Losses can no longer be carried back, btw, only forward. That was one of the major changes to the Tax code that Trump made (not like HE needs to carry anything back so why should anyone be able to), and often those losses represent very real losses. In the case of real estate, if you are ALLOWED to take depreciation and don’t? The “Allowed/Allowable” rule means that the IRS treats it as having been depreciated anyhow and so, when you sell the property? You have an even larger taxable gain.
If you purchase a rental property for 100,000 and sell it, two years later for $100,000? You have taxable gain due to depreciation.
Seriously, there are a lot of things to slam the Trumps for but this specific example? It is none of them. It isn’t to say that there might be some real tax chicanery going on, but this isn’t it.
Additionally, Net Operating Loss carry forwards phase out as your income increases thanks to the Alternative Minimum Tax, which kicks in to avoid an NOL from wiping out millions in income. A Net Operating Loss is something that anyone with a home business can incur…that is nothing special.
If you want to really look at something in the New York Times article to holler about, it would be “Step 6”.
A “Starker Exchange” or like-kind exchange, allows real estate owners to sell a property and, so long as they do things in a timely fashion, roll their gain forward into the new property and defer the taxable event of the sale.
Now this, on its own, isn’t too big of a deal. Deferring gain still means that, eventually, the tax birds come home to roost. HOWEVER, there are several ways to abuse this. The biggest is through estate tax laws (and the current Estate exemption is up to $5.6 million before there is any tax) and the “step-up” in basis received by an heir.
The NOL is an asset that dies with the taxpayer (although a living spouse may be entitled to a portion of it depending on business activities). It represents real losses, either through depreciation or just flat out expenses and business losses. Deferred gain though, that is where things get interesting. See, an estate of $10M is an estate of $10M (or $100M or whatever) is treated the same for estate tax purposes but, and follow this closely, the deferred gain vanishes.
Yup, roll all that gain forward and pass it on to your kids and that gain is gone. Here is how that works.
Deferred gain only becomes actualized gain at the time of the sale of the property. So, inheritance of the property doesn’t trigger the gain. Now Internal Revenue procedures track that deferred gain by reducing the “basis” (what you are considered to have invested in the property) of the next property. In other words, if you sell a property for a $30k gain but roll it into a Starker Exchange, you are just considered to have paid $30k less for the new property. Thus, when you sell that property that you purchased for $100k, you are taxed as if you only paid $70k.
Seems a sensible way to handle that right? But here is the thing, when you INHERIT property, YOUR basis in the property is considered to be fair market value at the date of death. In other words, you can chain a massive amount of properties together via starker exchanges, take the ordinary losses you are entitled to and…NEVER pay the tax on the gain.
THAT is the important piece of the puzzle. When people see families of Real Estate “tycoons”, that is what is happening. THAT is the part that is broken. Additionally, you can sell one property and defer the gain through multiple properties in a never ending cycle.
THIS is where your outrage should be focused because this is where things are broken.
This can just as easily be accomplished by putting things into a corporation (which never truly has to die), and rolling things on that way and slowly shifting the ownership of the corporation to your eventual heirs.
Deferred gain is broken. THIS is the tool of the wealthy that is not accessible to the poor. Net Operating Losses? I’ve got clients making $30k a year that have those…they do not have deferred gains.
Deferred gains should not be allowed on depreciated assets. It should be an either or. That is a loophole in the code that folks just haven’t cared enough to fix…and it would be easy to fix. Simply change the law to exclude the portion of gain from depreciation from the deferment or, to go even further, exclude the deferred gain from the step up in basis.
Think about this. A person could have an estate of $5.6M that is virtually all deferred gain and there is no tax paid by the estate AND no tax paid by the inheritors if they just immediately sell things for $5.6M (because of the step up in basis). The deceased has enjoyed full benefit of that $5.6 million, and has not paid tax on it. Then the children inherit the property worth $5.6M, paying no tax, and begin to depreciate the property and use deferred gains to keep the chain going. Give that three generations of even semi-intelligent investment and someone is going to be very, VERY rich and all of it will have been free.
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Or, for the TLDR folks, “follow the deferred gain!”
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So you’re saying that even though he’s a bitch, he followed the tax law?
Shit.
That system is broke.
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Seems like the slogan writes itself:
‘Why would we want to have people who don’t pay taxes running the government?’
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That is EXACTLY what I’m saying…and bless you for taking the time to actually read that wall of words by way of explanation. The thing is, in most cases, the tax laws of the US are surprisingly elegant (and also a handy self defense item to keep in the home) but, in the cases of the wealthy, there are things that can get really strange.
I had a fairly wealthy client running an NOL and, on the year his NOL got used up, he still had a bit of income showing. Not much. So little in fact that he qualified for the Earned Income Credit to help lift him above the poverty line. He and I discussed it briefly and he agreed with my urging him not to take the credit - despite being legally entitled to it. Thankfully we were in agreement, it would’ve been real awkward otherwise.
As a general rule, as a tax professional, I try to get people everything that they are entitled to, but there are limits. I even, years ago, got involved in a tax case that I first learned about via Boing Boing. Call me a happy, if really nerdy, mutant.
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Something else to consider is that, even if he was violating tax laws, unless it was blatant, the IRS no longer has the resources to carry out a significant number of the type of extended audits needed to resolve such a case. Since the IRS is a handy punching bag, politicians gladly score political points by cutting the IRS’s budget and manpower (despite the fact that the IRS brings in, on average, of $5 for ever $1 budgeted to them).
Auditors have limited amounts of time they can spend on an audit and big audits eat up a lot of manpower and time. So, while the average person can no longer call the IRS hotline during tax season to ask questions, the wealthy have much less fear of being audited…and the common person has a much greater chance of being audited because of it.
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if he did this on a federal level, he probably did it on a state level, which can’t be pardoned and likely violates some criminal laws, not just civil penalties where they can write a check to “fix it”
hopefully this will get to the state attorneys asap
There is no violation of the law, Federal or State. What he has done is perfectly legal. If you are curious, check my wall of words above. If not…yeah, no laws were broken by what is described in the articles.
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If he’s constantly depreciating his properties to sink his profits with fake loses, and avoid paying taxes, what happens if he ever sells one of those properties at the current market value?
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If he sells it without rolling it into another deferred gain property he would pay the tax on the now recognized gain.
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So if there’s a sale, it has to be carefully planned with somewhere to absorb the gains.
No wonder none of them wanted to divest everything willy-nilly, with no place left to hide the money.
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Exactly. He’d be better off liquidating some of his securities holdings rather than a property with deferred gain.
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I believe that badly-abused word ‘genius’ was used.
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Ok, now I can actually say I am shocked. Jared followed the law? Whoda thunk it!
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But if Kushner is claiming that much depreciation, it must all be on brand new properties, otherwise the depreciation will be long gone. So is he only investing in new apartments? That doesn’t match the mental picture I have of NYC real estate.
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