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Trump tax dodge common business strategy among housing types

Homebuilders and subprime lenders also benefitted from net operating loss carrybacks

Republican presidential candidate Donald Trump’s method to allegedly and legally avoid federal income taxes for up to 18 years after suffering a $916 million business loss in 1995 is based on the same law that prevented many housing companies from going out of business less than a decade ago.

In fact, back when this was going on in 2009 and 2010, real estate lawyer Chris Hunter, of the San Francisco Bay area law firm Morgan Miller Blair, told HousingWire the law is most applicable to homebuilders. 

When President Barack Obama signed the “Worker, Homeownership and Business Assistance Act of 2009” into law in November 2009, extending the first-time homebuyer tax credit as well as certain jobless benefits, he also extended the credit to repeat buyers and allowed corporations to recoup certain losses through back taxes.

Known as net operating loss (NOL) carrybacks, the law lets a company that made money and paid taxes on those profits in a past year obtain a tax refund if the company loses money in another year.

An article in The New York Times by David Barstow, Susanne Craig, Russ Buettner and Megan Twoheyoct gave the first, much-anticipated look into Trump’s tax records, which he has said he was waiting to reveal until his audit was complete by the Internal Revenue Service.

The New York Times piece revealed Trump’s never-before disclosed 1995 tax records that show “tax rules especially advantageous to wealthy filers would have allowed Mr. Trump to use his $916 million loss to cancel out an equivalent amount of taxable income over an 18-year period.”

The New York Times piece adds that although Trump’s taxable income in subsequent years is still unknown, a $916 million loss in 1995 would have been large enough to wipe out more than $50 million a year in taxable income over 18 years.

It’s this explanation that helps give context to Trump’s remarks during the first debate night when Democrat presidential candidate Hillary Clinton said there were years when Trump paid no taxes, and he replied, “That makes me smart.”

This statement dominated a lot of the commentary about the debate afterward and searching “Trump that makes me smart” on Google generates more than 7 million results.

In the New York Times’ explanation, “The provision, known as net operating loss, or N.O.L., allows a dizzying array of deductions, business expenses, real estate depreciation, losses from the sale of business assets and even operating losses to flow from the balance sheets of those partnerships, limited liability companies and S corporations onto the personal tax returns of men like Mr. Trump. In turn, those losses can be used to cancel out an equivalent amount of taxable income from, say, book royalties or branding deals.”

It continued that if the losses are big enough, they can cancel out taxable income. This is the same law that rescued a lot of homebuilders in 2009 and 2010.

The law allowed builders to sell projects at a loss and use that to offset taxes paid in previous year. Builders took the tax credit and used it to fund another project in a more desirable, stronger-recovering market.

For example, in 2010 homebuilder Lennar reported net earnings of $35.6 million for its fourth quarter and said it would receive a tax refund of $320 million as a result of NOL.

Even outside of homebuilders, bankrupt subprime lender and servicer Fremont General settled more than $89 million in tax obligations to the IRS without actually paying a majority of the back taxes due to NOL back in March 2010.

The U.S. Bankruptcy Court for the Central District of California, Santa Ana Division, approved a motion that allowed Fremont General to claim a NOL deduction for 2004 that’s attributable for its 2006 tax obligations.

In addition, Fremont General deducted additional 2004 taxes, thanks to that temporary extension of the Worker, Homeownership, and Business Assistance Act of 2009.

At the end of the New York Times article, Jack Mitnick, a lawyer and certified public accountant who handled Trump’s tax matters for more than 30 years, stated that Trump’s use of net operating losses was no different from that of his other wealthy clients.

“This may have had a couple extra digits compared to someone else’s operation, but they all benefited in the same way,” he said in the article. 

(Photo credit: Joseph Sohm / Shutterstock.com)

3d rendering of a row of luxury townhouses along a street

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