American Politics Thread: The Hunt for Blue November

[Mayo]

Originally Posted by nfotiu

The more I read, it seems that Trump plays very fast and loose by deducting his whole lifestyle as a business expense. His kid's private school, hair, jets, homes, cars, golfing are all business expenses.

Those laws seem pretty grey. We all know the IT contractors who incorporate themselves and buy season tickets, lease cars, boats, apartments and all that under their company and tell themselves it's ok because they once took a client to a game or on a boat. They seem to get away with it for years. Trump is doing that to the extreme. I assume he could be found guilty of something for it, but it also seems like those cases are hard to prosecute.

There should be some tightening of the rules, I would think.

So in the end Trump likely did nothing illegal, he and his associates know how to work that tax code inside and out. Seems like the type of guy you'd want incorporating tax reform. Kind of like Frank Abagnale was the type of guy you wanted working at the FBI.

I don't wish Trump to be president after November, and I think people screaming bloody murder at things like this "tax-gate" are Trump's best chance at getting re-elected. It makes the real issues just seem like more noise (hence why it seems Trump can get away with anything)

I really hope Trump & Trudeau are the last of celebrity politicians

[anyonebutedmonton]

Originally Posted by Azure

My problem specifically has to do with the way that real estate is taxed.

If you spend $10 million of your own money on real estate, you can take a small deduction on that property and depreciate it for 27 years. So basically $370,000 per year for 27 years straight.

Say your get $500,000 per year from your tenets, and $200,000 of that is allocated towards the cost of running the building and covering your yearly expenses. It means you have $300,000 left over. You simply deduct against the $370,000 each year, and show a $70,000 loss which allows you to avoid paying income taxes, but in reality your cash flow is fine and your asset value goes up each year.

Say the average growth rate of real estate is between 3-5% pear year, so after 10 years your asset has appreciated in value between 30-50%, so now that $10 million is now worth $15 million, and you sell your property you only worry about capital gains tax.

To me that seems massively unfair, and it is exactly what Trump and other large real estate holders are doing. I don't get why you should be able to depreciate against an asset that actually increases in value each year.

Same reason all the billionares are buying up massive amounts of land, farms and ranches. They can effectively reduce their tax exposure to radically low numbers because of the amounts you can depreciate and write off each year. Especially with land and the massive land taxes being owed.

You don’t get to depreciate on the entire $10M. There is a division between the land and the building.


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[Azure]

Originally Posted by CorsiHockeyLeague

There really isn't.

Tax avoidance is just that - the act of avoiding paying tax. It's not the act of avoiding tax that you're legally obligated to pay. That is called "tax evasion", not "tax avoidance", and that can result in fines or prison time.

Literally everyone who has ever paid income tax has engaged in tax avoidance. If you've ever deducted a medical expense or a student loan payment, you've engaged in tax avoidance. It sounds like a bad thing to people who are ignorant about how tax policy works, but it's really just the exploitation of rules in the system.

Now, you can make a distinction between tax avoidance that was intended by the drafters of the tax code, and avoidance that was unintended and is opportunistic ("loophole" exploitation), but simply put, everyone has to obey the law as it is written. It's not reasonable to expect the public to not only obey the law, but try to guess at what the people who drafted it were trying to do, and then avoid situations they weren't aiming for. You're not obligated to try to read the minds of the people who drafted the tax code, nor should you be: you're only obligated to obey the law that's on the page.

To combat this issue, tax authorities create anti-avoidance provisions. Those, too, are rules on the page that must be complied with. In Canada, there is a GAAR - a general anti-avoidance rule - that creates real tax policy problems. There isn't an equivalent in the USA, though there are half-measures. Up here, we call the non-observation of these anti-avoidance rules "abusive tax avoidance", as opposed to just regular tax avoidance, which is regarded as perfectly reasonable taxpayer behaviour. Locke may know if there is a different term for it down south of the border.

To sum up:

• If Trump simply engaged in tax avoidance to lower his tax bill or wipe it out completely, there's nothing wrong with that - that's simply following the rules in the most advantageous way you can.
• If Trump has failed to abide by the anti-avoidance provisions that are relevant to his tax circumstances, that's a violation of the law that may result in fines or penalties against him, or it may just result in liabilities for back taxes.
• If Trump has failed to accurately report his income (i.e. he earned more than he put on his returns), or has made a false statement in a return, that may be tax evasion, which would be illegal and possibly subject to criminal sanction.

In reality, though, Trump isn't the one actually filing these returns. Unless he's legitimately done something criminally sanctionable, it seems likely that he would be subject to monetary penalties that he would then get back from his tax advisors as damages, which they would then claim against their insurance. That's just a guess, really, but it seems like the most likely way that any action against Trump for tax shenanigans would play out.

On top of that, depending on how the real estate is actually held, Trump the person is not going to be liable if Trump the corporation is found guilty of tax evasion, something most people don't understand.

And I almost guarantee that Trump will have setup the holdings to shield himself from liability.

[activeStick]

I really wish the host of the debate did live fact checks. That would be an amazing element to add with Trump as a participant.

[Azure]

Originally Posted by anyonebutedmonton

You don’t get to depreciate on the entire $10M. There is a division between the land and the building.


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Most real estate purchases are also financed, so the $10 million dollar number isn't accurate in that regard either.

The other thing that seems to happen is inflating your operational expenses just to get to the point where the amount you can depreciate is offsetting whatever income you had left over and boom, income taxes avoided.

There has to be a reason you can depreciate an asset that appreciates in value for such a long period of time?

[Azure]

Originally Posted by Mayo

So in the end Trump likely did nothing illegal, he and his associates know how to work that tax code inside and out. Seems like the type of guy you'd want incorporating tax reform. Kind of like Frank Abagnale was the type of guy you wanted working at the FBI.

I don't wish Trump to be president after November, and I think people screaming bloody murder at things like this "tax-gate" are Trump's best chance at getting re-elected. It makes the real issues just seem like more noise (hence why it seems Trump can get away with anything)

I really hope Trump & Trudeau are the last of celebrity politicians

It is a widely held belief that if you want to avoid paying income taxes and occur long-term asset appreciation that you should invest in real estate.

The fact that people are shocked by any of what was revealed just speaks to their ignorance and a convoluted and stupid tax code.

[anyonebutedmonton]

Originally Posted by Azure

Most real estate purchases are also financed, so the $10 million dollar number isn't accurate in that regard either.

The other thing that seems to happen is inflating your operational expenses just to get to the point where the amount you can depreciate is offsetting whatever income you had left over and boom, income taxes avoided.

There has to be a reason you can depreciate an asset that appreciates in value for such a long period of time?

I’m somewhat ignorant with respect to US taxation. Do you mind explaining how the financing structure would impact depreciation? My understanding is that there could be interest on any debt financing, which would be deductible, but I’m not seeing the connection to the depreciation.


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[Looch City]

I'm pumped for this debate! This thread's going to be moving a hundred kilometers an hour, going to be a fun one boys and girls!

[bob-loblaw]

Originally Posted by Azure

On top of that, depending on how the real estate is actually held, Trump the person is not going to be liable if Trump the corporation is found guilty of tax evasion, something most people don't understand.

And I almost guarantee that Trump will have setup the holdings to shield himself from liability.

Aren't people on a company's Board of Directors personally liable for things like tax evasion? Maybe he made his kids directors instead for this reason. Poor Tiffany and Barron...

[Azure]

Originally Posted by anyonebutedmonton

I’m somewhat ignorant with respect to US taxation. Do you mind explaining how the financing structure would impact depreciation? My understanding is that there could be interest on any debt financing, which would be deductible, but I’m not seeing the connection to the depreciation.


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Rich people won't necessarily go spend $10 million of their own money on the real estate purchase. Instead they'll finance it and use the finance charges as an 'expense' to further reduce their income tax exposure.

If interest rates are around 2-3%, that is another $200k per year they are basing against they supposed income. Add in the amount they can depreciate per year, operational expenses, etc, etc, and it isn't that hard to show losses.

[anyonebutedmonton]

Originally Posted by Azure

Rich people won't necessarily go spend $10 million of their own money on the real estate purchase. Instead they'll finance it and use the finance charges as an 'expense' to further reduce their income tax exposure.

If interest rates are around 2-3%, that is another $200k per year they are basing against they supposed income. Add in the amount they can depreciate per year, operational expenses, etc, etc, and it isn't that hard to show losses.

Understood, but those interest payments that are deductible are real costs. As in, they are actually paid to the bank. They reduce net income because they actually flow out to third-party creditors.

The depreciation claimed would be in respect of depreciable assets, which would not include the land. I don’t see how the financing structure comes into play in this respect.


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[Azure]

Originally Posted by bob-loblaw

Aren't people on a company's Board of Directors personally liable for things like tax evasion? Maybe he made his kids directors instead for this reason. Poor Tiffany and Barron...

Tax evasion isn't as simple as a company openly directing its accounting department to not pay taxes.

Plus, it is almost impossible to catch people on tax evasion these days where the result is jail time. Most times the IRS will simply apply fines and the defendant will pay back taxes.

Most people really don't understand the lengths that the rich and elite will go to avoid taxes, store money in tax havens, etc. And then they also don't understand how the rich and elite have manipulated the system to the point where a bank can launder money for drug cartels and then simply pay a measly fine when they get caught.

When the Panama Papers came out and everyone lost interest after 2 weeks, it basically told the rich they can do what they want without recourse.

[Azure]

Originally Posted by anyonebutedmonton

Understood, but those interest payments that are deductible are real costs. As in, they are actually paid to the bank. They reduce net income because they actually flow out to third-party creditors.

The depreciation claimed would be in respect of depreciable assets, which would not include the land. I don’t see how the financing structure comes into play in this respect.

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My point about the financing had more to do with my earlier comment where I talked about someone taking $10 million of their money and buying real estate and then trying to reduce their tax burden.

In reality nobody starts with $10 million of their own money.

Basically I'm saying you have less income left to tax if you finance your real estate purchase. Which is perfectly fine. Debt financing is an entirely probable and ethical way of doing business, and many honest people and businesses have created jobs, paid taxes, etc that way.

What I don't understand is why someone can depreciate an asset on paper that actually increases in value over time.

[BoLevi]

Originally Posted by PsYcNeT

The left can't meme, and the right can't make a reasonably funny facsimile of The Onion, christ.

Both the Babylon Bee and The Beaverton are better than The Onion, which has lost a lot of its mojo.

[Lanny_McDonald]

Originally Posted by anyonebutedmonton

Understood, but those interest payments that are deductible are real costs. As in, they are actually paid to the bank. They reduce net income because they actually flow out to third-party creditors.

The depreciation claimed would be in respect of depreciable assets, which would not include the land. I don’t see how the financing structure comes into play in this respect.


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Some questions on this, because it seems sketchy. The properties have to be used for business and you only get to claim the value of the structure and not the land, correct? You have to be able to prove they are for business purposes, yes? In the example suggested, the individual gets to claim a deduction of $370K for 27 years, meaning the entire cost of the property is recouped in that time ($370K x 27 = $9.9M). Then the interest gets to be written off as a business expense, so at today's rates that would be $6.7M on a 30 year mortgage, or $224K a year? So without any revenue generation the property has has a tax avoidance value of $594K in the first year with a light drop each subsequent year? The mortgage on the full $10M is only $609K a year. That can't be right.

[Maritime Q-Scout]

Originally Posted by BoLevi

Both the Babylon Bee and The Beaverton are better than The Onion, which has lost a lot of its mojo.

Well, when the actual headlines are crazier than any parody you could make up, its hard to keep your mojo.

[opendoor]

Originally Posted by Azure

What I don't understand is why someone can depreciate an asset on paper that actually increases in value over time.

Because rich people are responsible for making the rules?

At least in Canada, the depreciation should eventually get covered by capital gains taxes at sale or at the owner's death. But in the US, if you keep the asset until you die, the capital gains disappear and get passed to your heirs at the market value on the date of death (called a "step up basis") with no capital gains attributed to it. And if you want to avoid the estate tax (which exists largely to counter the fact that there's no deemed disposition on death), there are numerous methods to skirt that

Also, by some strange coincidence (can't imagine why), with the 2017 tax overhaul in the US, like-kind exchanges (where you can sell an investment tax free if you use the proceeds to buy another similar asset) were maintained for only one investment sector: commercial real estate. So essentially owners of commercial real estate can keep buying and selling properties tax free, depreciate the hell out of it to reduce their income tax from other revenues to nothing, hold it until they die, and then pass it to their heirs with no capital gains tax owing (and likely little to no inheritance tax if they've structured it correctly).

[Azure]

Originally Posted by New Era

Some questions on this, because it seems sketchy. The properties have to be used for business and you only get to claim the value of the structure and not the land, correct? You have to be able to prove they are for business purposes, yes? In the example suggested, the individual gets to claim a deduction of $370K for 27 years, meaning the entire cost of the property is recouped in that time ($370K x 27 = $9.9M). Then the interest gets to be written off as a business expense, so at today's rates that would be $6.7M on a 30 year mortgage, or $224K a year? So without any revenue generation the property has has a tax avoidance value of $594K in the first year with a light drop each subsequent year? The mortgage on the full $10M is only $609K a year. That can't be right.

The scenario we used didn't account for the value of the land which can't be depreciated, but after that you are not far off.

You can also add in almost all other expenses and deduct those as well.

Mortgage insurance, property taxes, repair and maintenance expenses, home office expenses, insurance, professional services, and travel expenses related to management are all deductible in the year you spend the money.

The more I read about this the crazier it sounds.

[opendoor]

Originally Posted by New Era

Some questions on this, because it seems sketchy. The properties have to be used for business and you only get to claim the value of the structure and not the land, correct? You have to be able to prove they are for business purposes, yes? In the example suggested, the individual gets to claim a deduction of $370K for 27 years, meaning the entire cost of the property is recouped in that time ($370K x 27 = $9.9M). Then the interest gets to be written off as a business expense, so at today's rates that would be $6.7M on a 30 year mortgage, or $224K a year? So without any revenue generation the property has has a tax avoidance value of $594K in the first year with a light drop each subsequent year? The mortgage on the full $10M is only $609K a year. That can't be right.

A lot of commercial real estate (like Trump Tower.. cough, cough...) is on leased land (called a ground lease), so pretty much the entire value can be depreciated. Plus the lease costs can be deducted from income.

[Lanny_McDonald]

Commercial real estate is a scam and a half. The rich get richer.