Resurrecting Newsletter

New York Times: “Tax documents show Trump businesses lost more than $1 billion in a decade.”

I’m certain that’s the truth.

It is not uncommon for persons or businesses that continually invest in real estate to show tax losses. It makes no difference whether it’s rental houses or Trump hotels. The normal process for rental properties is to incur tax losses in the early years and taxable profits in later years. Two reasons: 1-rents start out low and increase every year. They are lowest in the first years and increase with time. 2-Interest is just the opposite. Interest is high initially and declines over time, creating tax losses in the early years.

The combination produces tax loses in the early years and tax profits in the later years. This is the nature of the beast. Every rental property goes through this process.

It’s common to incur taxable losses in the first ten years, essentially break even in the second ten years, and taxable income in the last ten years of a 30 year mortgage. If this process is allowed to continue unabated, eventually large amounts of taxable income will be generated, and large amounts of tax will be paid. In addition, if you hold a property too long, the value begins to decline. If you hold real estate too long you may actually lose money while incurring taxable profits that you have to pay tax on. (Caveat, unless you live in California where abandoned garages cost a million dollars.) In other words, you could owe taxes for going bankrupt. In my opinion, unless it’s an uncommon property, or a California property, you have to dispose of it before it starts to decline in value.

If you are constantly selling properties as they become inefficient, as I recommend, it is very difficult to maintain losses for ten consequence years. But it’s not impossible if you are continually increasing your holdings. However, the article may have been referring to the NOL (net operating loss carry-over) that Trump inevitably had throughout the ten years.

Bits & Pieces of tax law.

IRS’s Dirty Dozen scams — 2019 edition – The IRS highlighted the 12 abusive tax schemes it wants taxpayers and tax practitioners to be on the alert for this year. Phishing and scam phone calls were the biggest repeat offenders. Includes R&D credits. – Low income fraudulently claiming credits. – If you have money overseas, report it or face very large penalties. – Frivolous schemes. _ conservation easements. – Abusive tax shelters.

Optimizing residential real estate deductions – The new Sec. 199A safe harbor and tangible property regulations offer ways for landlords to reduce taxable income from rentals.

Avoid tax traps with a timely appraisal – New basis-consistency requirements make defensible valuations even more important.

Appeals court denies taxpayers’ attempt to revoke NOL election – The fact the taxpayers’ preparer made the Sec. 172(b)(3) election without their knowledge did not justify its revocation.

Can a state tax a trust based on the beneficiary’s residency? – The U.S. Supreme Court heard oral arguments in a case that will decide whether states can tax trusts based solely on the fact that a trust beneficiary lives in the state.

Robert Ellis, Ellis CPA Firm PC, 970.241.5040 voice, 970.778.1955 text


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