Nick Shaxson on tax…

No, not a pretty sight:

First, there’s depreciation. Cars, say, lose value, and it makes sense to set those real losses against tax. Buildings, though, generally appreciate in value—yet such is the power of the real-estate lobby that you still get the depreciation deduction, which is based on a formula.

No, buildings do generally depreciate. Land might not, location may not, but buildings do.

If this were not so then no one would ever knock down on old office tower to build a new one, would they?

As if that weren’t enough cream for the real-estate moguls, the sector is fueled by borrowing—and you can set the interest expenses against your income.

How remarkable. Costs are treated as costs.

Astonishing:

And this brings us to yet another avenue to tax-free living for real-estate moguls. These deductions can travel. If you are an active real-estate professional—that is, in part, if you spend at least half of your work time in real-estate activities—then you’re allowed to assemble all your losses and deductions, magpie-like, wherever and however you suffered them, whether it’s from Trump Tower or a Scottish golf course, and throw them all into one big pot. (When Trump was asked whether he was active in real estate, for tax purposes, he responded: “I don’t know how I am categorized, but I spend a lot of time on real estate … even during the campaign.”) You then stir in your federal income and hope those losses will offset it all, like one of those science experiments where you pour one liquid into another, brightly colored liquid to make it all go clear. With enough deductions, a real-estate mogul like Trump can zero out his federal income-tax bill.

If you don’t have a net income you don’t pay income taxes.

Naturally, this being Shaxson, this is all a scandal.

16 thoughts on “Nick Shaxson on tax…”

  1. One might almost say:

    A little knowledge is a dangerous thing (Murphy)

    No knowledge whatsoever is a positively catastrophic thing (Shaxson)

  2. > You stir in your federal income and hope those losses will offset it all
    Presumably though he can’t offset any capital losses against income? Although given how screwed up the American tax code is, I wouldn’t be surprised if he can.

  3. My response to “journalists” like this is; “Do you claim expenses and apply for a deduction from tax?”

    The response, naturally, is that; “My accountant deals with all that.”

    Well, yes, it’s all a bit confusing isn’t it, what with all that investment income and the money from Granny’s trusts…

  4. I don’t know how the US tax system works but if it’s anything like the UK system any allowances on buildings would be clawed back if/when the building is sold.

  5. @ Andrew M
    The point is that, with 90% LTV mortgages, most of the capital losses are borne by the banks when Trump declares a project bankrupt while he keeps all of the capital gains. If Shaxson had half a brain he could go to town on this instead of arguing “we don’t know this, that or the other so it must be evil”

  6. “Buildings, though, generally appreciate in value—yet such is the power of the real-estate lobby that you still get the depreciation deduction, which is based on a formula”

    If he’s talking about the UK, we haven’t had any tax allowance for depreciation on buildings for years. Dunno about the US, but their tax system is notoriously bad; its an old 1970s style one with high rates and lots of deductions.

  7. @Richard –

    IBAs were never an allowance on depreciation as such. They were an incentive to re-build after WWII.

    You can still get allowances on buildings in the UK – RDAs.

  8. Andrew, I didn’t know the history, interesting, but by the end they were generally regarded as a tax equivalent of depreciation.

    And yes, R&D allowances are available for buildings, but only if used for R&D – very different to the generic buildings allowances that Shaxson is drivelling about.

  9. Bloke in Costa Rica

    I suppose if buildings appreciate in value you could monetise that by turning the positive NPV into an annuity. You could use the annuity to pay the wages of the maintenance staff that any large edifice needs. Everyone’s a winner! Alternative explanation: Shaxson’s a cock.

  10. It took me about 5 minutes of research to find this on the IRS website:

    “You can deduct depreciation only on the part of your property used for rental purposes. Depreciation reduces your basis for figuring gain or loss on a later sale or exchange.”

    In other words depreciation you have claimed on property is taken into account in calculating capital gains. It gets clawed back.

    Which is as would be expected.

  11. John77, if 90% of the financing has made a loss, are there many cases where the residual 10% makes a gain?

  12. From my recollection, tax allowance for buildings was around 2% per annum, which was reckoned to be roughly and approximately equivalent to annual maintenance costs- painting, gutter clearing, repatching etc. Most buildings require some form of annual maintenance, don’t they?

  13. Mr Bean, IIRC, such costs would also be deductible, but Andrew C has it right. If the value of the asset is written down by 2% per annum, if the value of the asset actually increases (or even decreases at less than 2% pa) then there will be a tax charge when it eventually sold.

  14. @ Mr Bean
    Heard of Canary Wharf? Olympia & York started the development, filed for bankruptcy and the major shareholders in Olympia & York bought the part-completed development, finished and made £billions.
    But I think you may have misunderstood what I said. If Trump has a 90% mortgage and half the developments gain 30% in gross value and the other half lose 30%, he loses half of his investment but quadruples the other half so he ends up with twice as much in his pocket while half the banks lose two-ninths of their loans.

  15. …so he ends up with twice as much in his pocket while half the banks lose two-ninths of their loans.

    Sure – but bad lending practices have nothing to do with tax policy.

  16. @ dcardno
    *I* am not saying that they are. Please can *you* explain that to Mr Shaxson? Getting that across to him is too much for me.

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