How Trump got a personal tax break by defaulting on loans

By Allan Sloan October 10 at 3:36 PM

Republican U.S. presidential nominee Donald Trump said, "I knock out the tax code. I understand the tax code better than anybody that's ever run for president." (Jim Young/Reuters)

Now we know, from what Donald Trump said at last night’s debate, that he avoided paying federal income taxes for years.

Let me try to explain to you how he managed to do it; how his assertion that Hillary Clinton supporters Warren Buffett and George Soros did the same thing is almost certainly untrue; and what this tells us about Trump’s leadership.

The major game Trump played, based on the tax returns The New York Times made public and research by my colleagues, tax journalists and me, involves a tax loophole I’ve decided to call the Default Double Dip. This loophole was available only to taxpayers who defaulted on loans or had certain kinds of investments in companies that defaulted on loans.

[The most shocking part of Donald Trump's tax records]

It’s one of two loopholes, each available only to a handful of players, that Trump has apparently used.

Yes, it’s hard to believe that defaulting on a loan could generate a tax break for the defaulter — but that’s what appears to have happened with Trump.

Here’s a greatly-simplified version of how the DDD loophole worked.

If a loan on property that you own goes bad, you’re generally required to treat the lender’s loss as “cancellation of debt” income. That income offsets most or all of your loss on the property. But in the cases we’re talking about, the defaulted loans didn’t generate cancellation of debt income. So both the lender and the borrower end up being able to deduct the loss.

For the gritty details, ask the tax professional of your choice about the 2001 Supreme Court Gitlitz decision. (I got Gitlitz on the phone this morning, hoping to put a human face on a tax story, but he declined to talk with me.)

Gitlitz’ $1.02 million deduction was blessed in 2001 by an 8-to-1 Supreme Court decision that reversed rulings by lower courts. In 2002, Congress closed that loophole.

We don’t know how big Trump’s Default Double Dip deductions were, but they seem to have been in the nine-digit — and possibly 10-digit — range.

Trump talks about closing loopholes. However, there’s no need to close the Gitlitz loophole, because Congress closed it 14 years ago. And Trump isn’t proposing to close the loophole, opened in 1993 — ironically, during Bill Clinton’s presidency — that he helped push through Congress, and seems to be using now.

That loophole, an amendment to loophole-closing 1986 tax legislation, allows active real estate professionals like Trump (but not passive real estate investors) to use paper losses from real estate to offset other income.

Trump seems to have used that loophole to generate a $15.8 million loss on his 1995 return, which wiped out all of his 1995 income and added more than $6 million to the loss he carried into 1996, boosting it to about $916 million.

Most of this huge sum isn’t the normal kind of corporate tax loss, in which a company doesn’t have to pay tax until it’s earned enough to cover previous losses. It’s an oddball outlier, in which Trump’s lenders got to deduct the losses they took on their loans to him, and he got to deduct their losses, too, on his personal return.

The only loophole he proposes to close is the “carried interest” loophole that allows some hedge fund and private-equity managers to pay relatively low taxes on their share of their investors’ profits. It’s a loophole that I’ve ranted against for years, but that has remained open under both Democratic and Republican administrations.

But closing the carried interest loophole would have no impact on Trump, as far as I can see. I emailed his campaign recently asking about this and also asking whether anything in his tax plan would cost him or his family any money, but got no answer.

[Trump's awful boast about paying no taxes]

Trump isn’t proposing to ban the “cash-rich splitoff” loophole that Buffett and the then-Washington Post Co., which owned The Post at the time, used. I’ve written extensively about that deal and similar transactions that saved billions for shareholders, including me, in Buffett’s Berkshire Hathaway.

But as I wrote last week, Buffett has personally let billions of dollars of charitable deductions expire unused. So Buffett has made billions for his investors, but has not availed himself of billions of personal deductions.

I suspect, based on my years of parsing financial filings, that the real reason Trump hasn’t released his returns is that he paid little or no federal income tax for decades. I also think, based on the work of my Post colleague David Fahrenthold, that Trump’s charitable contributions were minimal, possibly nonexistent.

The bottom line: If Trump really wanted to lead our country in the right direction, he would have released his tax returns, disclosed the loopholes he used, said he would stop using them and proposed to close them. But he hasn’t done that, and he shows no sign of doing it.

Trump’s failure to lead or sacrifice, combined with his boasting about ducking taxes (which sticks us taxpayers with the bill), is the lesson I take from the Trump tax saga. I think it’s the lesson you should take, too. Regardless of your political beliefs. End of story.

The tax code allows real estate developers or managers to use special tax breaks and benefits that the rest of us can't. Here's how that works. (Daron Taylor,Sarah Parnass,Danielle Kunitz,Lisa Rein,Kelsey Snell/The Washington Post)

Read more:

Trump’s use of debts and tax laws spurs concerns about his methods

Trump's most enduring -- and unbefitting -- trait


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