The possibility that Donald Trump avoided paying income tax for nearly two decades has stirred debate about how, exactly, he managed to report almost $1 billion in net operating losses on his 1995 tax return. It has also triggered buzz about the copious benefits available to the real estate industry in our tax code.
The exact provisions that Trump and his tax lawyers exploited aren’t clear, because only three pages of the return were leaked to The New York Times — not the full document. (Trump, in a break with the pattern of presidential nominees for four decades, has refused to release his tax returns.)
But real estate development firms on average only pay about 1 percent of their income in taxes, according to data from Aswath Damodaran, a New York University professor of finance. To put into context, the average of all industries in his data (that include oil and gas, restaurants, mining and many more) is about 11 percent.
How can that be? There are a handful of perks the industry takes advantage of: For one, real estate firms are usually created as pass-through businesses as opposed to more traditional “C” corporations, so profits and tax losses are passed through to owners’ personal returns. This way, the losses can limit or cancel out taxes owed on other kinds of income. So Trump could use his losses to offset taxes owed on other types of income he brought in from his agglomeration of businesses (part of a 1993 provision pushed by the real estate industry) and carry them forward to use against income in future years.
Real estate developers in general benefit from more tax breaks than the average taxpayer. For instance, some can count losses that impacted creditors in addition to personal losses. It’s possible that Trump’s $916 million in losses included money loaned to him. Developers can also deduct depreciation of their properties over the course of a few decades, even though real estate typically gains value over time.
Investing in Washington: A good bet
Attempting to limit these kinds of lucrative real estate tax breaks and benefits is an uphill battle, to say the least.
That has a lot to do with the industry’s sway in Washington. Real estate interests have contributed more than $1.1 billion to campaigns, parties and outside groups since 1990, including $143 million in this election so far. Compared to other donor industries categorized by the Center for Responsive Politics, real estate has ranked in the top five out of 80 or so for almost 30 years.
“The potential tax benefits can far outstrip the expense” of making campaign contributions, said Matthew Gardner, executive director of the nonpartisan Institute on Taxation and Economic Policy. “It’s an incredibly good investment. We all know very well that a million dollar political investment can yield a much larger tax break.”
Trump himself lobbied to have tax breaks for the industry restored after they were stripped out in a huge overhaul of the code in 1986 that was inspired by outrage over the rampant use of tax shelters. In a 1993 bill signed by then-President Clinton, real estate interests got much of what they wanted.
The tax code keeps the industry churning, and lawmakers who most directly oversee that bible get a lot of love from the developers, brokers, agents and others who benefit from it. The industry ranked fourth — behind behind insurance, health professionals and securities and investment, or Wall Street — in contributions to members of the House Ways and Means Committee and their leadership PACs through June 30 of the 2016 cycle, at more than $2.8 million. In 2014, they gave $3.7 million. The equivalent body in the Senate, the Finance Committee, has received $5.5 million from real estate through the same date, more than the industry has given to any other Senate committee. Two years earlier, the committee received $3.7 million.
Among the industry’s many friends on the tax-writing committees, though, former Rep. Dave Camp (R-Mich.), who retired in 2015, was not in the top tier — despite being chair of the Ways and Means panel. In the 2012 election, the last one in which he ran, Camp received about $114,000 from real estate, not breaking the top 20 recipients of the industry’s cash that cycle. For comparison with other members of the committee, Rep. Shelley Berkley (D-Nev.) got $353,000, Rep. Rick Berg (R-N.D.) received $259,000 and Rep. Joseph Crowley (D-N.Y.) took in $170,000.
The feeling seemed to be mutual. As one of his final acts as head of Ways and Means, Camp released a Tax Reform Act of 2014; the overhaul would have lengthened depreciation timelines and repealed tax loopholes that could allow developers to defer capital gains taxes indefinitely, among other provisions.
“Many stakeholders in the real estate community, including NAR, viewed these proposals as a significant threat, even though there was little chance of the bills advancing in the near-term,” said an NAR statement posted on its website.
The bill also took aim at the sacrosanct home mortgage interest deduction that allows individuals to deduct interest on mortgages of less than $1 million. The Obama administration has also proposed limiting the deduction in its budget plans.
Camp’s move was a symbolic one, though; he knew he’d be gone soon and the bill would go nowhere — and he was goring too many of Congress’ cash cows.
Overall, the industry has given marginally more to Republicans since 1996, but in the last presidential election, the Republican nominee blew President Obama away:Mitt Romney‘s $15.4 million from real estate interests was nearly triple Obama’s $5.7 million.
Then there’s the lobbying piece of the picture: Real estate interests spend tens of millions influencing government officials each year, peaking at $95 million in 2014.
The National Association of Realtors is the industry’s single largest spender on lobbying; it has laid out almost half of the $41 million these interests have poured into lobbying in the first half of this year. (Worth noting: the NAR, like the U.S. Chamber of Commerce but unlike many other corporations or trade groups, includes state and local lobbying activities in its figures.)
And taxes are high on the industry’s agenda. Since 1998, real estate lobbying reports have mentioned tax bills 2,876 times, the second highest total after housing bills.
Not all of this lobbying on taxes rewards only high-rolling developers and real estate financiers. The industry has lobbied in support of the first time homeowners’ credit and extending tax relief for mortgage debt forgiveness, meant to help homeowners whose mortgages are underwater due to the housing crisis. But many groups do address the advantages we mentioned earlier. On the NAR’s website, the trade group outlines its stance on several key federal tax issues. In many cases, the materials explain that there’s no clear and present danger to the industry’s current benefits, but stress the crucial need to tell lawmakers about their usefulness in case of a tax overhaul.
The trade group also monitors “closely” and pushes back against any attempts to tinker with the mortgage interest tax deduction, saying it’s a “remarkably effective tool that facilitates homeownership.”
“It’s totally credible that these guys would be doing preventative lobbying just to try to stamp out any possibility of a threat,” Gardner said. “You’re certainly not going to wait for a threat to emerge.”
Lobbying isn’t limited to Congress: The real estate industry has listed the Treasury Department and the IRS 30 times on lobbying reports in the past four years. Industry interests weighed in strongly when the two agencies released proposed rules in 2014 to basically shut down leveraged partnerships, which would impact real estate; current rules allow tax-free transfers of property from individuals to partnerships.
Presidential tax plans
Real estate PACs and those who work in the industry have given almost $10 million to Hillary Clinton and her outside allies and $3.2 million to Donald Trump and his supporting groups — surprising, given that Trump is in the field himself, but he got a very late fundraising start.
(Sen. Ted Cruz (R-Texas), who dropped out of the race months ago, actually tops the list at $14.6 million due to contributions from two wealthy Texans to one of the super PACs supporting him; Faris and Dan Wilks made a fortune selling equipment to the fracking industry, and then went on a land-buying spree in Idaho, Montana and elsewhere.)
Clinton’s largest real estate donor is Jon Stryker, a liberal megadonor and president of Depot Landmark LLC, a Michigan-based real estate development company. Stryker gave $2 million to Priorities USA, the pro-Clinton super PAC.
Trump’s top industry donors are controversial Los Angeles developer Geoff Palmer,with $2 million to the Trump-backing super PAC Rebuilding America Now; andKushner Companies, whose CEO, Jared Kushner, is Trump’s son-in-law, with $100,000.
The National Association of Realtors gave a mere $11,000 to Clinton and $250 to Trump.
The candidates’ tax plans both would impact the industry, touching on issues that have cropped up on NAR lobbying reports.
The first involves transactions called “like-kind exchanges.” Currently, developers can defer paying taxes on profits made on the sale of a property if they buy another similar property, using what are sometimes called “1031 exchanges” for the 1920s-era section of the tax code that created them. While other industries can use them too, such as art investors, it’s not available to your typical investor – such as someone trading stocks or bonds.
Clinton would limit these tax breaks.
“The benefit was originally intended for small farmers, or others who are trading in or upgrading property or livestock but may not have the fiscal ability to pay taxes on their property at that time,” said Hunter Blair, a budget analyst at the Economic Policy Institute.
But they have become mightily important to real estate interests. “Any tax reform plan repealing like-kind exchanges would hurt investors and small businesses, increase financial leverage, weaken growth and the economy, and result in the loss of jobs,” said NAR president Chris Polychron in a press release.
Clinton would also close the related loophole known as “step-up basis.” Say you bought a house for $10,000, it appreciated to $100,000, and you passed away, leaving it to an heir. If you had sold the house before you died, you would have had to pay capital gains on that $90,000 profit. But when your heir gets his hands on the property, under current law the value basis is reset to $100,000, and nobody pays that capital gains tax.
Trump would end the use of step-up basis above $10 million. On the other hand, he’d eliminate the federal estate tax. Currently, only estates valued at less than $5.45 million (the 2016 level — double for married couples) can pass tax-free to heirs. Raising or eliminating the cap would be a boon to those holding many millions, or billions, in property.
“Ending that is pretty good for the industry,” Blair said.
Overall, Clinton’s plan overwhelming gets its revenue from the top one percent of taxpayers, and the bottom 95 percent would see little if any change, according to the nonpartisan Tax Policy Center. Trump’s plan gives the biggest breaks to the top one percent, giving that bracket 44 percent of the tax cut, while the bottom 80 percent get a 27 percent share of the cuts, according to an analysis from the liberal Citizens for Tax Justice.
NAR declined to comment to OpenSecrets Blog on either of the tax plans. But the organization is always vigilant, putting out regular briefs outlining provisions of concern that may or may not be on the front burner in Washington. One from last year, for example, warned the trade group’s members that while “no viable comprehensive tax reform legislation has been introduced…leaders of the tax committees have begun discussions on the outline of tax reform” and that legislators needed to be educated on their “vital roles.”