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How do you lose more than a billion dollars?

The New York Times announced that it had ten years’ worth of Donald Trump’s tax data from official Internal Revenue Service tax transcripts from 1985 to 1994. The news? Losses: almost $1.2 billion over the period and no federal income tax for eight out of the ten years. Trump responded on Twitter that real estate developers in the 1980s and 1990s “were entitled to massive write offs and depreciation” that could show losses for years.

The question is, was Trump truly so bad at this business that the losses piled up sky high? Or was he engineering huge losses on paper to offset paying taxes on income?

Appreciate depreciation

The first step to clearing confusion is to understand that losing money doesn’t mean companies and people don’t walk away with cash. “There’s lots of legal ways to report the non-cash losses [but] that doesn’t mean you don’t have the cash in your pocket.,” said Thomas Patrick Dore, Jr., a concurrent professor of law at the Notre Dame Law School and professor of practice at the Fitzgerald Institute for Real Estate, as well as senior counsel in Davis Polk’s Real Estate Group in New York City.

The main tool is depreciation. In accounting, there’s an assumed natural lifespan for assets that companies buy. “If you were in the trucking business and you had to buy new tires, you could take a loss for the amount it cost you to buy the tire,” Dore said. “But when you buy the building, you can’t deduct the whole cost of the building.” Instead, the company deducts the initial cost of the building over some standard useful life. Depending on the specifics, that can be decades. That’s the key to long-term paper losses.

Morris Armstrong, an enrolled agent who can represent people before the IRS, provided an example. “You buy a condo for $275,000 and rent it out,” he said. The depreciation is $10,000 a year and you rent the condo for $2,000 a month. At the end of each year, you’ve seen total depreciation of $10,000 and rental income of $24,000.”

“Now you pay for the real estate taxes, insurance, maintenance and mortgage interest, which total $20,000,” Armstrong said. At the end of it all, you have business costs—the depreciation and the other expenses—of $30,000. Because the rental income is less than the costs, your rental business has a $6,000 loss. But because $10,000 of the loss is only on paper, you have $4,000 cash in your pocket.

The difference between renting the condo and big real estate development is only one of size. “Add more zeros, the basic concept does not change,” Armstrong said. And all the while, the market value of the building can keep climbing, making the developer wealthier.

If the loss is bigger than the income from the property, “you carry it forward as a net operating loss,” said Francine Lipman, a tax law expert and professor at the University of Nevada, Las Vegas law school. “It’s especially great if you can do it with somebody else’s money.” Someone like a Donald Trump might borrow significant amounts from banks, use their money to buy property, operate the property, deduct the depreciation as well as interest from the mortgage and other expenses, take home a lot of cash, and technically be losing money in their tax filings.

“Many real estate people would like to build a portfolio, have it grow, and keep building,” said Tim Wallen, CEO of MLG Capital. “If I’m always growing, new deals create losses. I could be generating losses on the new stuff I’m doing to offset the profits on the old stuff.” Although that may not be possible to do indefinitely, it is possible to pursue that strategy for long periods.

Limits of tax transcripts

Did Trump use such strategies to keep claiming large losses while continuing to do more development, generate increased cash, and put that into yet newer projects? Charles Harder, a lawyer for Trump, according to the Times, wrote to the newspaper to say that the type of documents they had were “notoriously inaccurate” and “would not be able to provide a reasonable picture of any taxpayer’s return.” The reporters for the story checked with Mark Mazur, currently director of the Urban Brookings Tax Policy Center and a former director of research, analysis and statistics at the IRS, about the quality of the data. Mazur reportedly told the Times that such transcripts were “handy” summaries of tax returns.

However, a summary would not have enough detail to determine what actually happened because of a difference between paper losses and real losses. The first is an accounting acknowledgment of something that technically lowers value but may not mean a cash outlay, versus the second. Mazur told Fortune that “there’s no way to tell” the difference with transcripts, or even filed 1040s. The details are buried in other forms, such as the 8825 or 5498.

And frequently, real estate development is done as deals owned by dedicated legal entities like limited partnerships, which pass along profits to the partners rather than having them held by a corporation. To know the degree to which losses were paper or tangible would require having the tax filings of the legal entities, which in this case would be the limited partnerships that technically own and run a given building or real estate project.

In short, with the information available, there is now way to know if Trump was living hand to mouth while losing more than $100 million a year on average or eating caviar with a golden spoon. But if he had been engineering paper losses to avoid paying taxes, he wouldn’t be the only real estate mogul to have done so.

Did Donald Trump Lose More Than $1 Billion On Purpose?

Appreciate depreciation

Limits of tax transcripts

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