That Makes Me Smart

Of course, I watched the presidential debate on Monday night. It was great entertainment. Captivating reality TV. Better than “The Apprentice.” Better than “Naked and Afraid.”

To me, the highlight of the show was Donald Trump’s blurting out a response to Hillary Clinton’s conjecture that he may not be releasing his returns because he may not be paying taxes: “That makes me smart.”

I am sure that it is no surprise that the next day Mr. Trump denied making that statement. Even for The Donald, it’s hard to unring that bell when 84 million people saw him make the comment on television.

Politics aside, it does not surprise me at all that Mr. Trump pays little or no taxes on the over $500 million of income that he says he made in 2015. The reason? Mr. Trump’s primary business is real estate.

I have had quite a few clients over the years who were wealthy real estate professionals – in particular, owners of rental real estate. With leverage – often funded by nonrecourse loans – and with the application of real estate cost segregation for tax purposes, a real estate investor can generate “HUGE” tax deductions with a relatively modest investment of cash. Theoretically, the accelerated depreciation is a timing difference – pay Uncle Sam now or pay him later. But, by using like-kind exchanges and more leverage to trade up to bigger deals, one can delay paying the piper for a long time. Heck, if you can manage to die with the low adjusted tax basis assets – made low by tax depreciation, you can avoid the income tax recapture altogether, thanks to the date-of-death income tax basis step-up (or step down) rules!

Being a real estate investor alone could pretty much wipe out income taxes, if the strategy is pursued aggressively. I’ll bet Mr. Trump deploys any number of other tax shelters. Forbes reported this summer that Mr. Trump has given away over $60 million in tax-deductible conservation easements primarily related to his golf courses. It would make Mr. Trump smart to license his name through an offshore company based in a tax haven with little or no income tax. It would make Mr. Trump smart to let his children and grandchildren invest in his deals, directly or through trusts, in order to lower his future estate taxes. It might possibly make Mr. Trump smart to own his foreign assets, such as his golf course in Ireland, in offshore entities that don’t pay U.S. tax. I know that it would make Mr. Trump smart to own his assets through entities not domiciled or having nexus in New York, which has very high income taxes. It would make Mr. Trump really smart to not be domiciled in or a statutory resident of New York City, but to be domiciled in and a resident of Florida, where he has at least one home.

So, why does Mr. Trump fear people knowing what his tax returns say? I don’t think the discouraged and angry blue collar workers that comprise the core of his supporters will take kindly to a man who says he is worth $10 billion paying less tax than they do.

Do I find these types of tax reduction strategies offensive? Not at all. Helping people pay only as much tax as they legally must pay is how I make my living. I help make people smart.

VKM