Follow the money. Always follow the money. – Deep Throat
Recently the New York Times published an analysis of 20 years’ of President Trump’s tax returns, concluding that he paid no taxes in 10 of the last 15 years and just $750/year during the first 2 years of his presidency.
Is something dubious going on? Or is this quality advertising for his accountants?
I’m tax-curious… let’s follow the money.
Taxes
Paying as much tax as legally required (and not a penny more) has been a long-standing cornerstone of US tax policy and public sentiment. Individuals and business are expected to utilize every deduction, exemption, and credit available to them.
Tax avoidance / tax minimization is fair and proper. Tax evasion is… not. Even so, we often hear calls for the rich to pay their “fair share.”
Is $750/year in income tax a fair share for a self-proclaimed billionaire? That is up for each voter to decide for themselves.
But let’s look at the numbers.
(The New York times brings up other issues – national security risk, emoluments, pay to play, conflicts of interest, nepotism, etc… I leave those topics for another day.)
“Billionaire” Tax Burden
I have shown repeatedly that it is possible for a married couple to earn ~$100,000/year and pay little to no income taxes.
But if you are in control of more than $1 billion in assets, have multiple streams of income from book deals, royalties, brand licensing, hotels, golf courses, and numerous other businesses, with incomes of $100+ million/year, how is it possible to get to a $0 or $750 tax burden?
Easy: lose lots of money. No profit means no taxes.
The hard part is losing $100 million dollars year after year after year, and still, you know, living.
The NYT has a beautiful interactive graphic of the President’s income and losses
The Business of Losing Money
To be successful at the business of losing money requires having positive cash flow and (primarily) paper losses.
Real Estate is perfect for this (Related: Never Pay Taxes Again Using Rental Properties.)
An oversimplified example:
Let’s say you buy a rental property for $1 million. It has revenue of $100k/year and operating expenses of $20k/year.
Of course you don’t pay cash – you get money from a bank, perhaps one in Germany or Russia. Ideally, as an interest only mortgage with zero personal liability (if you default, the bank can only take the property, nothing you own personally.)
The interest on the loan is deductible – let’s say $50k/year.
Also deductible is depreciation – in the case of commercial real estate about 2.5% of the property value each year (39-year property), or another $25,000/year deduction.
But wait, there’s more!
You didn’t just buy a $1 million property, you bought an $800,000 property with $50,000 of appliances (5-year property), $50,000 of office furniture and fixtures (7-year property), and $100,000 of electrical systems, natural gas systems, and sewage pipes (10-year – 25-year property.) This common process is called cost segregation, and it increases deductions to maybe $45k/year.
$80k net profit – $50k mortgage interest = $30k profit / positive cash flow
Minus $45k depreciation equals $15k tax loss.
You are now cash flow positive, while also having a paper loss to offset profit elsewhere –> $0 tax bill.
Rolling over the loans
Interest-only mortgages often have balloon payments – you pay interest only for 5-7 years and then the entire loan in full (usually by getting another mortgage.)
And as you know, property always goes up in value (lol) – so you replace the old $1 million mortgage with a $1.25 million one and get $250k in pocket money. (It’s debt, not income –> no tax.)
This is where the big money is.
The depreciation, however, is always based on the original purchase price… so with a good property you will trends towards a taxable profit.
This is the case here also: Trump Tower and Trump World Tower are both very profitable ventures.
Whose income is offset with some very unprofitable ones.
Golf Courses
The Apprentice and related licensing generated a ton of profit ($400+ million), most/all of which appears to have been sunk into golf resorts around the world. All of which lose a lot of money – $315 million in loss since 2000 (and counting.)
As a business, golf courses benefit from all of the same deductions, exemptions, and credits as any other, including depreciation, with one nuance – golf courses are primarily land, land itself is not depreciable. There are nuances to golf course taxation that I don’t care to explore – but it seems these losses are more real than paper. (“Real”)
Overall Tax Summary
In short – thanks to interest only mortgages, cash out refinancing, generous real estate related tax benefits (depreciation), and an overall unprofitable business empire, it is possible to live richly while paying zero to little in taxes. (maybe)
This is all legal and completely above board. Encouraged even.
And it isn’t every year – a copy of the 2005 tax return (peak Apprentice earnings – more on this later) shows $38 million in federal income tax paid (25% effective tax rate.)
So it appears that all the president’s taxmen were doing what any good accountant should do for an individual who repeatedly loses insane amounts of money…
Don’t hate the player, hate the game – IceT
But…
… things do start to look a bit sketchy…
The Summer Home
One way to reduce tax burden is to give money away to charity.
Over the period reviewed, the President claimed charitable donations of $130 million, a generous sum. Of this, $119.3 million (90%+) is in the form of a conservative-easement deduction… agreeing not to develop a property. (Read: no money changes hands.)
In the case of the Seven Springs property, this appears to be after nearby residents used legal means to prevent development. When life hands you lemons, turn them into a tax deduction.
Additionally, while this property seems to be primarily used as a personal retreat for the family, it is treated as a business for tax purposes. This allowed writing off $2.2 million in property taxes, whereas individuals are only allowed to deduct $10k in property and state tax, and then only if they otherwise itemize.
Looks like a nice place to visit though – maybe I just couldn’t find the Airbnb listing.
Seven Springs Estate – photo via Trump.com
Creative Write-offs
$70,000 for a toupee.
$95,464 for a makeup artist for a “consultant” (the daughter.)
$1.9 million for a legal defense fund for the son
Generally all of this is considered non-deductible by the IRS, but it is routinely written off on the President’s tax returns. That’s a no no. It makes you wonder what else is buried in there.
When I said write it all off, I meant legally.
The $73 Million Tax Refund
And perhaps the most interesting issue is a claim for a $73 million tax refund.
During the 2008 Financial Crisis, it was allowed to carry-back losses to previous years (use 2008 losses to offset gains from 2005+.) Thanks Obama!
The President’s taxmen claimed losses of $1.4 billion for 2008 – 2009, and used those losses to offset most (all?) of profits from the Apprentice (peak earnings 2005-2008.)
Whether this was legitimate is still in question – the audit is still underway some 10 years later.
Summary
The truth is, these are not very bright guys, and things got out of hand. – Deep Throat
Tax returns by themselves don’t disclose everything, and without seeing the actual returns we are speculating, but overall the NY Times article is very well written. I have done my best to clarify the findings for personal curiosity’s sake, but recommend reading the article in its entirety.
How much or how little tax was paid isn’t the important point, although it will probably get the most attention. As highlighted, thanks to interest only mortgages, cash out refinancing, generous real estate related tax benefits (depreciation), and an overall unprofitable business empire, it is possible to live richly while paying zero to little in taxes (as long as someone is willing to keep the refinance train going.)
The US tax code can be very generous. However, I do prefer business people who actually make money.
There does seem to be some questionable / dubious practices highlighted, which could be considered tax evasion. Hi Al Capone! But a thorough audit would be required to say for sure. Complex tax issues are not always black and white, and it is common practice to err on the side of paying less tax. However, there seems little reason to give the President the benefit of the doubt, based on a history of tax fraud, misuse of charitable funds. and shafting small-business owners. (Given the history – I reject the idea that “he is a terrible businessperson” – this seems more like an intelligently implemented money laundering system.)
The New York Times does mention that it has more to share, and we should expect to learn more in the coming weeks. I eagerly await a deeper understanding.
Excellent article, thank you for breaking down the cash flow – paper loss = no tax concept. Good to move beyond headlines like “he only paid $750” and understand what is happening. I have no doubt he is getting away with tax fraud but a lot of what we are seeing is the way the tax code is written.
I once saw a chart showing actual US income tax collected back 100 years. Even though the top federal tax bracket fluctuated all the way up to 90%, the actual taxes collected each year stayed pretty consistent. Your explanation shed some light to how the rich have been doing it for many years.
A millionaire once told me: the golden rule is the one that has all the gold makes all the rules. Or something like that. Great article, thanks for breaking it down & also making me laugh- “couldn’t find the Airbnb”…
I learned a bunch about real estate $ from a super rich guy with tons of properties. He said, “I don’t earn money, I borrow it.”
But he also spent some time in jail for bank fraud, so win some/lose some.
This is the best explanation I’ve read since this report came out. None of it surprises me, but it’s still shocking, and it’ll end up catching him in the end.
Isn’t this blog all about intelligently implemented tax laundering systems?
Tax evasion and money laundering are illegal, ma’am.
I hope you’re joking
Loved your run down and money trail. I wish the news would cover it this way. No doubt part of what he’s doing is legal, but a lot of it is most likely not legal, and who knows how long it will take to uncover with all the hocus pocus going on.
Well, I’m sharing this post with everyone snd I trust others will too, expect lots of new followers :-)
Thanks for telling it straight cause depending on which news you watch/read you only get one side of the story….Just what I needed to hear today!
Thank you, Pam.
The core real estate taxes are probably legit. Hard to lose $100 million every year and still have people lend you money though… that is suspicious.
This is an article from 2017. They knew about his outstanding loans even back then. It’s so hard to find news sources about everything we knew with all the new info about his finances. But this seems to sum it up well “too big to fail”
from: https://www.npr.org/2017/06/20/533552769/trump-may-have-a-lot-of-money-but-documents-show-he-owes-a-lot-too
Many of those banks would come to regret their ties to Trump. Within a few years, large parts of Trump’s financial empire came crashing down, and Trump filed for bankruptcy for the first time in 1991.
During long, contentious negotiations with Trump, bondholders were forced to take big losses on their investments. They had no choice, Blair says. Although lenders could have seized Trump’s properties, they needed the Trump brand name.
“They wanted his name on the buildings because he still had this kind of allure. So he was too big to foreclose on,” Blair says.
I’m digging the Go Curry Crackdown! The Seven Springs property irks me. To be a part of a business with associated expenses, doesn’t it require to show income as well?
haha go curry crackdown. I legit lol’d.
You at least need to show an attempt to get revenue. Advertising, etc… Maybe that stuff is there, but seems sketchy.
At another property they have something like 10 goats so they can claim a bunch of farming deductions/credits… definitely not really a farm, but working the system hard. Probably something similar with Seven Springs.
great analysis, thanks for sharing.
Looking forward to additional detail.
I hear part 2 dropped today
I’m looking forward to your take on – national security risk, emoluments, pay to play, conflicts of interest, nepotism, etc. He claims the NYT story is fake news. All he has to do is make his returns public to “prove” that. Thanks for all the info about this and the many other very helpful posts over the years.
My take is it is bad, man. Really bad. (I talk about this stuff more on Twitter)
Great analysis. better than anything I saw in the media
Wow, thank you!
I highly recommend the 9/29/20 episode of The Daily podcast. The President’s Taxes, an interview of the authors of the NYT article. 30 minutes. Enlightening.
https://podcasts.google.com/feed/aHR0cHM6Ly9yc3MuYXJ0MTkuY29tL3RoZS1kYWlseQ/episode/Z2lkOi8vYXJ0MTktZXBpc29kZS1sb2NhdG9yL1YwL1J3c2FGX3FzTm8yaG1aa1FlbVRQSXBEZlFtek9WbEdCcDBoRG93ZXBsTTA?hl=en&ved=2ahUKEwiQtJr2_47sAhUYknIEHYP3BB8QieUEegQINRAH&ep=6
This is a great summary, thank you Jeremy. What struck me the most in reading the NYT article is the fact that the money he’s been collecting in the White House from oligarchs ($7M so far) is so small compared to the debt coming due in 3-4 years ($421M). I think he’s desperate, and desperate, humiliated narcissists are dangerous
With 5-7 year terms on mortgages, there is always debt coming due in a few years. That by itself isn’t so risky as long as the banks continue to lend money. As the story goes (not sure if it is true) US banks stopped lending to Trump because of his history of bankrupting everything, so he had to seek unconventional funding elsewhere. Maybe the Sopranos. That’s the danger (and security risk.)
Can you really spend the cashflow from the depreciation though? You will need to do capex at some point and sweating the assets to defer capex and thereby pocket the depreciation expense is a very tricky thing to get right long term.
You don’t spend the depreciation – it just means no tax on an equal amount of income. The cash flow comes from paying little tax and the cash out refinancing.
Was it $750 due with the tax filing, or $750 taxes owed for the year? That’s a big difference.
I am getting a refund for 2019 even though the tax for the year is well over 6 figures — because I already paid in advance.
Though anyone with a business can take all sorts of deduction, wouldn’t he have had to have very low W-2 salary and hardly any personal cap gains and interest to only owe $750 in taxes on his personal income tax form?
Judy, nobody would write an article about a guy who paid $10,000,750 in tax with the last $750 due at filing.
What does it mean when the NYT story says, “. . . he made the required payment to the IRS for the taxes he might owe – $1 million in 2016 and $4.2 million in 2017. But virtually all of that liability was washed away when he eventually filed, and most of the taxes were rolled forward to cover potential taxes in future years.”
With complex tax returns it is really common to pay an estimate of what you might owe in April and then square up when you actually file later.
If the IRS then owes you, you can choose to roll that forward to the next year. In this case, seems he may have a $5 million credit applied to the 2018 return.
Great article. Very well written!
This is one of the best takes I’ve seen, right up there with David Cay Johnson. Trump has a rare talent for balancing making money and losing money. However, with the income drying up, and the lack of cash flow, his debts are going to be a huge problem.
Wouldn’t he be better off if he just sold off his assets, settled his debts, and bought BRK? Assuming his total assets are net positive, of course. Then — as we GCC fans know well — he could control his income by selling as needed, and live very nicely on tax-free capital gains.
Thank you.
It’s only possible to have tax-free capital gains if you spend little (~$100k/year.) The president pays $70k/year on hair.
Selling the real estate to cash out is problematic as all prior depreciation is taxed at sale, along with the capital gains. Being fully leveraged means little (if any) cash to pay the tax bill.
And I used to lose sleep about deducting my “home office”! Very thin line the leader of the Free World walks. Conjures up a quote by the British politician Denis Healey-
“The difference between tax avoidance and tax evasion is the thickness of a prison wall.”
A lot of people don’t claim deductions because of the worry. I sometimes refer to this as the Fear Tax.
Well, at least this tells me I’m on the right track for my own rags to riches story. Cash-out refi here we come!
Enjoyed this analysis. You have a knack for breaking this stuff down in an entertaining way. Thanks.
Excellent piece of work. Thank you Jeremy. If there is a hole to wiggle through Trump will find it. He is the master of deflection. Every fact and analysis has been “Fake News” since the 2016 debates to the present. He is now desperate to remain in power – No Matter What. His is a well crafted plan at every turn. Supreme Court nominee, ballot fraud, law and order president. Maybe he file bankruptcy…again?
It’s nice to finally see America run like a (bankrupt) business /s
$50,000 of appliances
$50,000 of office furniture
$100,000 of electrical systems, natural gas systems, and sewage pipes
——————
How do you value the electrical systems in an existing building? Some sort of replacement estimate cost?
What happens at the end of the 5 year appliance depreciation?
Yeah, basically.
After anything is fully depreciated, no more depreciation deduction. This just let’s you front-load the deductions.
Negative gearing (USA: negative leverage?) is utilised by about 15% of individual taxpayers in Aus.
A loss on rents is a deduction against income such as wages.
The intention is longer term positive gearing or longer term capital gains with 50% discount or, for less lumpy income, mortgage equity withdrawal.
It results in lower rent : asset price. For housing it makes renting more affordable but purchasing less affordable by low tax rate individuals.
Thank you so much for this analysis! I was on your site yesterday going over your rental income tax return trying to make sense of it, but with the scale of these transactions, it didn’t make sense. I appreciate your work and you have the most understandable tax break downs I’ve ever seen. Thank you!
Yes it makes sense that his tax bill is low because he’s living on borrowed money from a refinance of his real estate. I listened to this other show in which it stated that Forbes has his net worth to be $2 billion. He owns a lot of commercial and residential real estate. So if he had to pay of half a billion dollars in loans he would have no problem doing so.
Assuming that he isn’t already at max leverage.
Thanks for the analysis! I recently watched “Active Measures” that details who Russian oligarchs/criminals/politicians have yuuge ties to his properties and use it launder their own funds being funneled out of Russia. While the movie has the likes of Hillary Clinton, John McCain and former US diplomats to Russia, its editing is pretty bad. Not sure if I can recommend it just because the editing.
Thanks for breaking this down further. I’d skimmed the NYT original and saw between the lines a bit, much like you have, that the headline shouldn’t be the $750…but rather all the creative methods. Of course, that’s hard to use in summary form!
Thanks for going deeper on the creative depreciation methods in commercial real estate and some of the business deductiosn that have been highlighted in the media.
Great article! I’ve liked your tweets so I thought I’d come check out your blog.
I’ve always wondered where the line between legal tax avoidance and paying our fair share.
Welcome