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Wall Street Journal gets in wrong on Trump tax laws

Posted by John Reed on

This Trump tax stuff is maddening. Today’s Wall Street Journal has an article written by John D. McKinnon and Laura Sanders. (“Tax Benefits Flow to Rela Estate”) My strong impression is they are either dishonest or incompetent or both.

It says,
“Racking up huge losses…isn’t that tough…thanks to the considerable benefits of the U.S. tax code confers [on] the highest levels of the real estate world…”

I have no idea what they are talking about and I wrote Aggressive Tax Avoidance for Real Estate Investors, 19th edition.…/aggressive-tax-avoidance-for-rea…

First off losses just means spending more than you take in. You do not need the tax law to lose money. Secondly, I am not aware of tax law benefits to the highest levels of real estate. There is a thing called carried interest in the hedge fund business, but that’s more Wall Street than real estate. And I’m not sure the law per se restricts that to the “highest levels.” What tax law clause says only rich guys can do this? There are probably some benefits that are restricted to rich guys because of needed economies of scale, but who would vote for a tax law that exempted rich guys?

They then spin the mundane, non-controversial, loss carry back and loos carry forward rules, that were enacted in 1918 and have never been opposed by either party as some sort of loophole.

They then use language I have not heard since the Tax Reform Act of 1986 was passed about the “enduring influence the industry has in Washington.” They used to say things like that before the TRA 86; not since, except for these two reporters who apparently did their research for this article based on pre-1986 news stories.

Here’s another gem:

“Under some circumstances, real-estate business owners…can even take losses on properties that were highly leveraged through loans.”

Huh? All business owners can “take” losses on anything if they have losses. “High leverage” means the loan-to-value ratio of the mortgage on the property is above about 80%. By using the word “even” the writers imply there is something illegal or immoral about high leverage. What might that be? The average first home-buyer uses high leverage. And they can “even” deduct the interest on that high leverage loan if they itemize.

The next sentence in the article apparently is some sort of typo because I think it says the opposite of the truth. They say Congress changed rules so business owners would “not get a tax windfall when their loans were written off or renegotiated.” What in the hell are they talking about?

Here is the pertinent item from my Aggressive Tax… book:

“Debt forgiveness
“The American Recovery and Reinvestment Act of 2009 lets business debtors who pay off a debt at a discount elect not have to pay tax on that debt-forgiveness income until 2014 and they can spread paying that tax over five years. Application of the Original Issue Discount rules is also delayed until 2014. This applies to discount payoffs in 2009 and 2010.
“The five-year delay goes away immediately if the businessperson gets out of the business before 2014.”

All that means is if you renegotiate and don’t have to pay all of a debt, you do not have to pay immediate tax. You have to pay it later. Why? Because you don’t have any cash at the time of the forgiveness to pay a tax on such a “phantom” gain!

This is not a gift to rich developers. It is an acknowledgement that formerly rich developers who just lost their ass and managed to not have to pay 100% of the money they owed may be better off financially by being forgiven some of that debt, but you can’t get blood out of a stone so change the part of the tax law that makes debt forgiveness an immediate taxable event.

They then say, “Another strategy is to avoid forgiveness of debt by shifting what is owed on a losing property to a winning one.”

What the heck is that about? For one thing, you do NOT want to avoid forgiveness of debt. They must mean being taxed immediately on the amount by which the forgiveness raised your net worth.

Shifting debt? What is that? Paying off a mortgage on one property by refinancing another property? And what is this losing versus winning property stuff? I recall no provision of the Internal Revenue Code that talks about such things.

And there is a principle that says what property secures the mortgages does not affect the deductibility of that loan’s interest. Only the purpose of the loan decides that. For example, if you refi an apartment building and spend the money on a vacation, the interest on that loan is not deductible even though it is secured by a business building.

There’s more in the article, but you get the idea. McKinnon and Saunders do not know what they are talking about. If they dispute that, they can send me the citations of the laws supporting what they claim in this article.

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