Donald Trump has taken a lot of heat over the years about his income taxes or, more specifically, his ability to get away with paying what most would consider his fair share.
Trump has a tight grip on his tax returns, becoming the first president in 40 years not to release them to the public. According to data reported by The New York Times, Trump paid just $750 in federal income taxes in 2016 and 2017 — less than the average of $819 paid by families making over $20,000 a year in 2017.
According to data from the IRS, Americans in the most common income bracket earned an adjusted gross income between $50,000 and $75,000 in 2017 and paid an average income tax of $5,077.
According to The New York Times, the former president’s various businesses lost hundreds of millions of dollars over the previous 20 years, allowing him to reduce his federal tax liability to almost nothing.
Benzinga has not seen Trump’s tax returns and cannot verify the facts reported by the Times. However, assumptions can be made based on Trump’s biggest business venture – his real estate holdings.
Real Estate Tax Benefits
Real estate has unique tax advantages, primarily the ability to write off depreciation against income. A real estate investor would typically show a loss on their income tax return while having a positive cash flow for the year.
Fractional real estate investors also receive similar benefits. The investment platform Houses came, known as letting investors buy rental property shares for as little as $100, paid out $47,000 in dividends to investors in 2021, but only about $2,800 was considered taxable income. The rest was non-taxable on the return of the principal.
That means Homes That Became Homes investors collectively only needed to report $2,800 in taxable income, despite receiving $47,000 in dividends. Arrived Homes has already paid out $303,000 in dividends so far in 2022 and investors will likely get another nice break at tax time next year.
Another likely reason for Trump’s low tax bills is the use of tax loss carryforwards. Companies like the Trump Organization can carry forward losses from one year to offset taxes in subsequent years. Trump used this strategy after racking up nearly $1 billion in losses in the early 1990s. He was able to carry those losses every year until 2005.
How Individuals Use This Tax Strategy
Individual real estate investors use Trump’s tax strategy every year, which is one reason why real estate is such a popular asset class. Investors can even take advantage of these tax benefits without buying their own property.
Passive investments as a limited partner through private equity real estate can provide many of the same benefits. Individuals who participate in a crowdfunded offering will receive a K-1 tax document each year, which shows the investor’s share of net income or net loss after deducting expenses such as depreciation.
Fractional investment platforms such as Homes on Reach simplify the tax preparation process by sending a single 1099-DIV tax form each January. The form summarizes the taxable income for all investments held on the platform, eliminating the need to add up all the deductions.
Related: Browse Private Equity Real Estate Investment Offers on Benzinga Alternative Investments
It is important to understand that everyone’s income tax situation is different and not all private equity real estate investments have the same pass-through tax structure. It is always a good idea to consult with a certified public accountant to determine how a particular investment will affect your unique tax situation.
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