The New York Times wants to tell us that Donald Trump lost lots and lots and lots of money. Which he did, they’re entirely correct. We know very well that he had some horrendous years. However, they’re still not quite grasping the detail about depreciation and the effect it has upon real estate developers’ – OK, speculators’ – taxes. And that’s the thing, what they’re measuring here is tax losses, not cash ones. Because their source is tax returns and details from them.
Donald Trump’s businesses lost a total of more than $1bn from 1985 to 1994, enabling him to avoid paying income taxes for eight of the 10 years, the New York Times reported on Tuesday. The newspaper, which said it obtained printouts from Trump’s official Internal Revenue Service tax transcripts, found that Trump’s core businesses, including casinos, hotels and apartment buildings, lost $1.17bn over a decade. Trump posted losses in excess of $250m in both 1990 and 1991, according to the records, which appeared to be more than double any other individual US taxpayer in an annual IRS sampling of high-income earners.
The source story is here in the NYT. And to understand it we should take out those two horror years when airlines and casinos and all that were going broke. The tax losses from which end up on Donald’s account even as the cash losses might well end up with bond holders.
Some fraction of that ocean of red ink represented depreciation on Mr. Trump’s real estate. One of the most valuable special benefits in the tax code, depreciation lets owners of commercial real estate write down the cost of their buildings. “I love depreciation,” Mr. Trump said during a presidential debate in 2016. In “The Art of the Deal,” Mr. Trump points to one of his Atlantic City casinos to illustrate the magic of depreciation. If the casino’s cost was $400 million, he says, he would be able to depreciate it at a rate of 4 percent a year, allowing him to shelter $16 million in taxable income annually. But while this example is intended to show the benefits of depreciation, it also demonstrates that depreciation cannot account for the hundreds of millions of dollars in losses Mr. Trump declared on his taxes.
Well, actually, that depreciation can explain a lot of what’s going on. Because it’s not that difficult to structure all joint ventures and other operations etc so that all of the depreciation from all of the assets ends up on The Donald’s tax form. True, this also means that any capital gains will also end up there. But on a year by year basis it’s entirely feasible for a real estate developer/speculator to be losing, on a tax basis, tens to even hundreds of millions while piling up unrealised assets in real estate equity. Which doesn’t turn up on said tax form. Not even, necessarily, when it is sold and realised as long as it is then reinvested in more real estate.
I do not, by the way, claim that Trump is indeed some business God. I tend to think that that old calculation is about right, that he’d be as well off as he is if he’d taken his inheritance and stuck it into Vanguard index funds. Just opinion but that’s what mine is.
But the NYT is, I think, wrong to dismiss this depreciation effect as not being the cause. Or perhaps their dismissal of it as not enough of a cause. Yes, agreed, there were some bad years there and he did have real losses. But that still leaves an awful lot of room for an awful lot of depreciation – some percentage points of all the assets involved – to be turning up as losses on his tax forms. And do note, depreciation is a tax item, not a cash one.