If Trump Gets His Way, Real Estate Will Get Even More Tax Breaks

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SOURCE: NEW YORK TIMES

URL: http://www.nytimes.com/2016/09/02/business/economy/if-trump-gets-his-way-real-estate-will-get-even-more-tax-breaks.html?_r=0

by: James B. Stewart


It’s hard to imagine a tax code more favorable to real estate developers than the one we already have.

Donald Trump has come up with one.

Thanks to some major loopholes in the existing tax code that treat real estate developers as a special privileged class, it’s entirely possible (even likely) that Mr. Trump pays little or no federal income tax.

But Mr. Trump’s new tax proposal doesn’t just preserve those breaks, it piles on new ones for real estate developers like Mr. Trump himself — at an estimated cost of more than $1 trillion in tax revenue over a decade.

Moreover, this doesn’t count Mr. Trump’s more general tax cuts, which deliver the biggest windfalls to the highest earners. Many real estate developers would reap further gains from those provisions if they became law.

Even conservative Republican tax experts have denounced the specific real estate measures Mr. Trump has outlined.

“If you want to create a recipe for an abusive tax shelter, take those elements and bake for 15 minutes,” said Douglas Holtz-Eakin, an economist who served as director of the Congressional Budget Office and is now president of the American Action Forum, a conservative pro-growth advocacy group. He was also an economic policy adviser to former Republican presidential candidate John McCain. “It’s a phenomenal benefit for housing and commercial real estate interests.”

Let’s start with carried interest, a much-criticized tax loophole that allows private equity operators, hedge fund managers and real estate partners to convert ordinary income into capital gains, which are taxed at a lower rate.


Wealthy hedge fund managers and private equity partners like the former Republican presidential candidate Mitt Romney have attracted much of the criticism for exploiting the loophole, but the concept originated with real estate developers long before hedge funds were commonplace.

Instead of taking a fee for their management services (which would be taxed as ordinary income) people who earn carried interest take a percentage of assets under management and a percentage of the eventual profits, a formula often described as “two and twenty.” The percentage of profits is taxed at the lower capital gains rate.

In what at first might seem a laudable effort to put the public interest ahead of his own financial gain, Mr. Trump called for abolishing the loophole. “We will eliminate the carried interest deduction and other special interest loopholes that have been so good for Wall Street investors, and people like me, but unfair to American workers,” Mr. Trump said in Detroit on Aug. 7.

But his fellow real estate investors and the Wall Street interests he lambastes needn’t worry. He’s offering them an even better tax break that renders carried interest irrelevant.

Mr. Trump has proposed a new rate — 15 percent on all corporate and business income — that is lower than the current capital gains rate of 20 percent on profits from the sale of assets, which is already well below the top tax rate on ordinary income of around 40 percent. The new lower rate would apply to “pass-through entities,” according to Mr. Trump’s plan, “Tax Reform That Will Make America Great Again.”

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