Growing hostilities between Hillary Clinton and her fellow presidential candidate Donald Trump reached new lows this week in the latest televised debate. The issues of income tax, tax losses and real estate are now centre stage in the US with Hillary Clinton promising all kinds. This particular argument revolves around a rumoured $900 million loss which Donald Trump claimed on his real estate assets some years ago.
Tax returns and tax losses
Over the last couple of years there has been significant focus on the London property tax system but this has most certainly switched to the US in light of the recent clash of the titans. The New York Times has apparently obtained evidence that Donald Trump claimed a tax loss of over $900 million in 1995, in relation to his real estate assets. While Donald Trump has not denied this allegation it is the suggestion he has not paid any federal income tax for up to 18 years because of this tax loss which has caused such a stir.
The system in the US is fairly simple stating that investors are able to claim losses on real estate assets as well as wear and tear. There has been a suspicion for some time that some investors are using the real estate tax system to increase their tax losses beyond what they would actually suffer in reality. Indeed there are even suggestions that some investors “trade” assets with other developers so as not to crystallise any tax liabilities. All unproven we have to say.
Is this practice illegal?
The simple fact is that all of the tax codes used by real estate investors, and other investors in the US, are perfectly legitimate and above board. The fact that Hillary Clinton promised to abolish these tax loopholes further strengthens the case because if they were illegal there would be no need to abolish them. So from a purely technical point of view, as the law stands at the moment, real estate investors such as Donald Trump are well within their rights to use the system to reduce their tax bills.
Whether or not such practices are morally acceptable is a whole different matter and one which the likes of Donald Trump have no interest in discussing. When asked whether he used tax laws to his advantage he simply confirmed what everybody knew. At the end of the day Donald Trump is a businessman and ultimately he is doing nothing illegal.
While threats to close various real estate tax loopholes will grab the headlines in the US for some time to come, many people are missing a very important fact. These often advantageous tax codes attract significant investment, in the good times and the bad times, and also ensure good liquidity. If any tax benefits were withdrawn from the real estate sector this would likely see a drop in investment which would impact many areas of the economy. So, while from a moral standpoint it may seem unfair that real estate investors are able to use various tax codes to reduce their tax liabilities surely this is just the flipside of the risk coin which they throw every time they invest?