Want To Make Millions And Pay No Taxes? Try Real Estate

Real estate is a cyclical business. Markets crash. Deals sour. But hard landings are rare for a savvy property mogul, thanks to the U.S. tax code.

Take Harry Macklowe, a New York City developer. Macklowe, 81, hasn’t paid income tax since the 1980s, according to a court opinion in his divorce proceedings issued in December. The ruling, which also divided luxury homes and an art collection worth more than $650 million between Macklowe and his ex-wife, Linda, doesn’t suggest the couple did anything wrong to avoid paying income taxes. Rather, it highlights the special perks available to property investors in the U.S.—advantages that have expanded under the tax law signed in 2017 by Donald Trump, America’s real estate developer president.

“The real estate industry is notorious for throwing off lots of deductions, and real estate developers are notorious for paying very few taxes,” says Steven Rosenthal, a senior fellow with the Urban-Brookings Tax Policy Center. “As Leona Helmsley said, ‘Only the little people pay taxes.’ ”

As Democrats in Congress seek Trump’s tax returns, Macklowe’s divorce case provides a hint at what they might find. Real estate moguls have a range of strategies available to reduce or postpone their tax liabilities. ...

Macklowe’s tax affairs emerged in his divorce case because the two parties disagreed on how to value the tax credits and liabilities he’d generated during his career. Linda claimed her ex-husband used $448 million of net operating losses to defray income taxes from 2008 to 2015, according to the court opinion. That helped the couple reduce their taxes and maintain a lavish lifestyle, which included homes at the Plaza Hotel and in East Hampton as well as the purchase of a yacht for more than $23 million.

Those trappings might not have been available if Macklowe had made his fortune in another industry. The U.S. tax code is designed to measure profitability over time, allowing businesses to write off losses in one year against income in the next. For most companies, that provision is limited to losses on their own capital as opposed to losses on borrowed money. “There’s a general rule that you’re not supposed to be able to claim losses for more than you put into a deal,” says Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy, a left-leaning think tank. “Real estate is the exception.”

By Paul Caron for the TaxProf Blog

Published: 04/16/2019

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