Commentary: Real Estate Investors Will Love This Last-Minute Change to the Tax Plan
A last-minute change to the just-passed tax plan that would benefit real estate investors like Donald Trump should surprise no one. He loudly opposed 1986 tax reform legislation because it shut down tax shelters for real estate investors like him. So, it’s only natural that the Trump-GOP tax plan creates new loopholes for real estate investors and makes the tax code more complicated.
The 1986 law solved a lot of problems. In the first half of the 1980s, Americans had lost faith in their tax system much as they have today. The tax rules encouraged investors to do all sorts of things with their money that did nothing to build the economy, but rather only made sense as tax shelters. The rules related to depreciation and losses were so generous that anyone with money and a decent accountant could very quickly write off the costs of their investments, including ones in which they were just passive investors, and use any losses to offset their other income. Real estate developers built office buildings that no one needed. Business ventures were created to produce losses that only existed on paper and sheltered real income from taxes.
It got so bad that tax dodging seeped into popular culture. People who were around in 1985 remember the hit TV show Moonlighting, which began airing that year, starring Cybill Shepherd and Bruce Willis as private detectives. Few remember that when the show began, the detective agency owned by Shepherd’s character had not solved any cases, but was set up to produce losses because it was a tax shelter. In the show, the characters decided to start solving cases and make the agency a profitable business. But back in the real world, tax sheltering did not end until Reagan signed the Tax Reform Act of 1986, which made it much more difficult for people to manipulate losses to create tax shelters.
Real estate investors like Trump immediately pushed to have some of the loopholes and special breaks inserted back into the tax code, at least for their own industry. When he testified before a Congressional committee in 1991, Trump called Reagan’s reform the “1986 catastrophe of the tax reform act.”
Trump and the rest of his industry were successful. A couple of years later, Congress made exceptions to the loss rules, for example, allowing taxpayers to report losses from real estate investments even when their own money wasn’t at risk. A few years later, Trump took advantage of this when he reported more than $900 million in losses from his failing casinos, even though investors put up the bulk of that money.
Under the Trump tax plan, loopholes for real estate investors like him and his son-in-law Jared Kushner will be bigger than ever. All versions of the Trump tax plan have included some type of break for “pass-through” businesses, so-called because their profits are passed through to their owners and subject to the personal income tax rather than the corporate income tax.
The final bill provides a deduction for pass-through income that is supposed to benefit those business owners who create jobs. The original version of this deduction, which was in the earlier language passed by the Senate, limited it to half of the compensation paid to employees by the pass-through business. But a provision inserted in the final bill also allows the deduction to be claimed up to a certain fraction of the company’s depreciable property—property like buildings that lose their value over time. This makes the deduction easier to claim for companies with few employees but a lot of buildings.
Guess what kind of business owns this type of property but has few employees? Real estate firms. Trump is said to do his business through hundreds of pass-through businesses.
Decades ago, Congress made a terrible mistake by listening to Trump as he described the “catastrophe” of 1986. Let’s hope that the next Congress listens to ordinary Americans when they describe the Catastrophe of 2017.
Steve Wamhoff is a senior fellow at The Institute on Taxation and Economic Policy.