By now, most should be familiar with the New York Times exposé on President Trump’s tax returns. For the uninitiated, Donald Trump had not released his tax records to the paper (or anyone else) as was customary for Presidential candidates dating back to the Trump's Tax Returns1970s; the Times sourced them by alternative means declaring they were ‘legally obtained.’ I’m will not weigh on the ethics other than to state it would have been better if they had been officially released instead of surreptitiously spirited through some backchannel.

Many, including myself, have assumed the New York Time’s reporting is accurate as neither the White House nor the Trump Organization has refuted the findings, merely taken umbrage with publishing information President Donald Trump asserts is private and has gone to great pains, including taking the Manhattan District Attorney before the Supreme Court, to keep from public view.

Donald Trump’s Tax Returns

Regardless, there are many lessons to be learned so let’s dive in. For simplicities sake, I’ve assumed the financial information gleaned is not only complete and correct but in compliance with the requisite Internal Revenue Service tax codes. While certain monies are known to be in dispute – including a $70 million tax refund under audit – for our purposes, I will assume everything was done by the book. Or more accurately, a book.

Please note, I am not a tax professional, CPA, or otherwise and am not employed in real estate. I have owned numerous properties and did write a 432-page book on finance. So, I know a thing or two. To begin, real estate professional is an official IRS designation. To qualify for this moniker, you don’t have to have a degree or be licensed, real estate just has to be your full-time job, meaning 750 hours per year.

Mr. Trump famously launched his professional career in the 1980s with the splashy transformation of the circa 1919 Commodore Hotel on 42nd Street in New York City into the garish Grand Hyatt at a cost of $100 million. Trump’s business empire includes Mar-a-Lago in Palm Beach, Florida and the Doral golf resort in Miami. Since the turn-of-the-century, the Trump Organization has undertaken many real estate deals in Manhattan and abroad, licensed the Donald Trump name, and built assorted golf courses around the world. In the early 2000s, he hosted The Apprentice TV show where he netted nearly half a billion dollars.

Real estate development and investment properties are subject to many tax breaks not available to ordinary Americans. For instance, once you meet the basic requirements, you can take an unlimited amount of real estate paper losses against your income no matter how much you make or how large the loss! Losses can also be carried forward as as a tax deduction nearly infinitum. Both of these tax avoidance strategies are exactly what Mr. Trump did and it’s all perfectly legal.

Tax Avoidance Strategies

But, in order to write off billions in business losses, one must have billions of business losses. Right? Maybe. Maybe not. In steps, a concept called depreciation. Back in the 1990s, I owned a company that leased computers, printers, furniture and other capital equipment to small and medium-sized businesses. Without going too far down a rabbit hole, at that time, if you purchased say, a computer for your business, you would depreciate it over five years unlike a box of pens which you could immediately deduct as a business expense.

Depreciation assumes the item purchased has a useful life beyond one year. So, in the computer example, a business owner could take a 20% deduction in the value each year even if they put the item out of service before then (very likely with computers). As an alternative, my leasing company would purchase the computer and ‘rent’ it to the client turning it into an immediately deductible expense, just like the pens; we would then hold the assets and get the benefit of the depreciation to offset our income.

The advantage of such an arrangement to the end-user is obvious – they no longer have to carry capital items on their books. That improves both cash flow and their balance sheet. As the lessor, it gets a bit more complicated but suffices to say we shared some of the same benefits as those in the real estate game.

Trump used depreciation and other accounting tricks aggressively, perhaps too aggressively which is why he claims he’s constantly under audit (President’s and Vice Presidents are automatically audited once they enter office). Thus, whatever monies he made in the past 20 years, so long as they didn’t exceed the amount of accumulated losses, was essentially tax-free. That explains why he paid so little in taxes.

Business Losses and Bankruptcy

So why have all of these tax liability matters become a presidential campaign issue if it’s all perfectly legit? First, the Times report claims Mr. Trump amassed millions in personal debt dating back to the 80s. It’s also a well-known fact the Trump Organization floated bonds for Trump casinos in the 90s, offering stratospheric interest rates to bondholders and subsequently defaulted when the market cratered. Mr. Trump was also provided relief in bankruptcy court on more than one occasion. Again, why is all this important? Because much of the business expenses and tax deductions he claimed weren’t even his money!

Think about it. If you borrow money and fail to pay it back for whatever reason, it is considered income in almost all cases. So, what Trump did – this is the aggressive part – is booked the loss of other people’s money as tax credits by claiming the deductible expense as his own and conveniently ignoring the defaults and forgiveness. So, these were paper losses in the truest sense of the word. Again, I am not a tax professional, but I know enough this financial chicanery ain’t strictly kosher. The Manhattan district attorney is apparently also looking into these matters as part of their investigation.

I’m not a lawyer either but my understanding is his attorneys and accountants at the time advised him these types of maneuvers were terrible risky and ill-advised. Naturally, he did them anyway. So, it would appear he ended up having his cake and eating it – booking massive losses of other people’s money and using them to shield future income that was his money. Pretty nifty!

Forgiven loans, defaults, and other situations where you receive monies but fail to repay are often called phantom income. I have familiarity with this phenomenon from the leasing business, under very different circumstances, usually when depreciation and income fell out of step. It’s no fun.

Yet this is where things get a bit murky in the Trump situation as bankruptcy can be used as a means discharge phantom income (none of my companies ever declared bankruptcy). It’s possible Trump, who is well-known for having multiple failures, using the courts as a way to dispense with this pesky problem. At this point, nothing would surprise me. With the information available, however, I cannot hazard even a wild guess as to whether this was the case.

Cost Basis

Circling back to depreciation, you must also bear in mind the least appreciated Law of Physics – what goes down, must come up. When you depreciate an item, it reduces the cost basis. Say, you buy a property for $1 million and depreciate it by $50,000 per year for 10 years, taking the write-off per annum. At year 11, you decide to sell. Your original cost basis must be reduced by $500,000 ($50,000 x 10) to take into account the yearly deduction.

If the property value increases to $1.5 million at the time of sale, you would book a cool million of taxable profit. Now, here’s another advantage real estate professionals get – you can defer the tax by rolling that profit into a new purchase. So, using the proceeds toward a $2 million property would yield a new cost basis for that parcel of $1.5 million ($2 million – $1.5 million + the $1 million profit). This is called ‘boot’ for reasons unknown. This strategy can go on FOREVER thus deferring your tax burden FOREVER.

As an aside, that was precisely how the tax code was written for ordinary folk prior to the 1986 tax law. If you sold your home, you could roll the proceeds into a new domicile with no tax consequence. Not anymore. In addition, the 2017 tax bill also rejiggered the deck in strange and mysterious ways that benefited folks in the real estate business. No surprise there!

Federal Income Taxes

The larger question at hand and why all the hubbub involves ethics and morals and equity. Whether you a Democrat or Republican, ask yourself, should President Donald Trump, with a purported net worth in the billions, have a tax bill of $750 in federal income taxes when that’s an equivalent tax rate of a US taxpayer earning $21,000? Should ANY billionaire? I don’t have that answer. How many millions of dollars did Trump spend in legal and accounting fees in order to save tens of millions? Beats me. Did he somehow create a financial perpetual motion machine whereby the American taxpayer actually ‘paid’ for all these complex machinations in lost tax revenue and bad debt? Again, I cannot even hazard a guess.

Neither will I weigh in as to whether taking an aggressive position toward taxes is in any way wrong. To this point, I’ll reference the esteemed Judge Learned Hand, who famously said, “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

Congress writes the tax code – 3 million lines and counting – and the IRS is empowered to enforce it. If Mr. Trump’s actions were invalid, fraudulent, criminal, whatever, they should investigate, render judgment, enforce the code and apply penalties where warranted. However, unlike criminal proceedings in this country, with the IRS, you are guilty until proven innocent. Keep that in mind, always…

A Presidential Debate

Yes, this all may sound terribly naïve. Seems Mr. Trump had good reason not to release his tax returns – and we may have just discovered why. He may in fact have a patriotic duty as the leader of the country to pay his fair share – whether you plan to vote for Mr. Trump or Mr. Biden, it is YOU who will decide – yet he used every tactic available to maintain their secrecy and, it appears, with good reason. He has an army of attorneys at his beck-and-call who can obfuscate, delay, and otherwise gum up the wheels of justice. Don’t misconstrue, I’m NOT in any way condoning his actions, not by a long shot. If he perpetrated a fraud, he should be held accountable, same as if you or I committed a similar misdeed. If not, he should be exonerated in a public forum.

Finally, I’ll leave you with this fun little tidbit. In Finland, November 1st is celebrated as “National Jealousy Day.” It is the one day a year the government releases every citizen’s taxable income. The goal? Why transparency, of course. Same reason every Presidential candidate for the last four decades, until Mr. Trump, released their tax returns for public scrutiny, including Joe Biden.

No, it isn’t the law of the land, but it should be. Stay safe!

About The Author

Henry Daas is a 30-year serial entrepreneur who has founded numerous companies in the tech, finance, web, real estate, and custom integration spaces. For the last decade, he Henry Daas Daas Knoweldgehas coached entrepreneurs in a variety of vertical markets and helped scores of business owners level up their game. He also offers a 20-week one-on-one course in managing and growing your personal finance, based on a 432-book he self-published entitled, FQ: Financial Intelligence. For more info, visit


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