Wednesday, August 24, 2016

TRUMP’S TAXES: Real Estate Tax Shelter or, Trade or Business Losses?

A recent column in the New York Times about Donald Trump’s possible tax treatment on his not-yet-released federal or state income tax returns cited the possibility that he could be paying very little, if any, income tax - based on Trump’s use of available tax law treatment for actively conducted real estate rental, management, and development effort.

However, Trump’s trade or business asset holdings today consist mainly of hotel and other business interests, and not primarily real estate rental or development interests as was the case many years ago. This presents a different type of taxpayer profile, and filing results.

TRUMP’S TAXES: Real Estate Tax Shelter or, Trade or Business Losses?
Internal Revenue Code Sections provide for the ordinary deduction of “losses realized in a trade or business” for a taxpayer “engaged in a trade or business”. This term, trade or business, means virtually any kind of enterprise conducted by a taxpayer, unless limited by IRC Section 469 – “Passive activity losses & credits limited”. Section 469 applies when a taxpayer has a business interest, and a loss from such interest, but, does not “materially participate” in their business - especially rental property.

The hotel business is not “rental property”. It is a true business with employees, varied activities, many different types of revenue streams other than (merely) rent, and high levels of risk and reward. Most hotels have two sets of owner/operator companies: the land and building owner, and the operating owner. These two companies may be two completely different sets of owners, or intermixed.

A main tax benefit of a hotel property ownership interest is the large capital investment in both real and personal property. Commercial real property generally has a long depreciable life of 39 years. But personal property, such as furniture, equipment, interior improvements removable in nature or, serially replaced, will throw off large annual depreciation deductions often in excess of the cash equity invested in the business. The hotel business operator also operates several restaurants, bars, casinos, spas, etc. in its business.

The Result: large depreciation deductions in the conduct of a trade or business, combined with a few operating loss realities or years, other tax optimization strategies, can yield a well-sheltered (otherwise positive) total taxable income. Add some “net operating loss (“NOL”) carryover” deductions from prior total tax loss years – which may be carried over for up to twenty years, and the result can be an ongoing total negative income for years. Further: given Trump’s serial business failures, he may have a large closet of NOL’s to draw on.

Today’s Sunday NYT ran an article on Trump’s asset holdings and liabilities, found on public records. I wrote this piece yesterday, but, the article validates what I say above. It also says Mr. Trump is the recipient of some 500 LLC Schedules K-1 which then need to be flowed into and reported on his individual tax returns. This is an absolutely complex, taxpayer profile.