Trump could have counted the $916 million loss against future income, reducing the amount on which he would have been required to pay taxes. Yet even without that catastrophic loss, a range of maneuvers would have been available to Trump as a real-estate developer that could have limited if not eliminated the taxes he owed the government.
Many developers are able to make money year in and year out on their projects without paying taxes on those gains, said Lester Weingarten, an accountant and a partner at Gettry Marcus in New York. That is even without the benefit of a loss like the one Trump claimed in 1995.
Tax authorities allow developers to subtract the cost of acquiring new property from their incomes over a fixed number of years, a process known as depreciation. In principle, depreciation represents the decay in value of the initial investment because of wear and tear, but in practice, the value of investments in real estate are often increasing even as they depreciate on paper.
"Generally speaking, depreciation has nothing to do with actual diminution of value," Weingarten said.
In any given year, a developer might be earning money from renting the property, but reporting losses to the Internal Revenue Service because subtracting the costs of depreciation reduces income below zero.
Usually, if an investment gains in value rather than depreciates, the investor will pay taxes on the increase in wealth once she sells the asset. Real-estate developers, however, are often able to sell one property at a profit and purchase another one without paying taxes on the gains, a process that can be repeated over and over.
Developers can expand their holdings, and their annual revenues, deferring taxes as their wealth accumulates. In some cases, if a developer dies before paying, then the gains will never be taxed.
Similar rules do not apply to stocks, for example. When investors make money selling stocks, they generally cannot avoid paying taxes on the gain even if they put the money back into the market.
Meanwhile, real-estate firms typically borrow substantial amounts of money to finance their projects, and borrowers receive favorable treatment from the corporate tax system. They are able to deduct the cost of interest from their income every year as well, a benefit that is unavailable to firms that finance their investments by paying up front.
These exemptions make sense from an economic point of view, said Kyle Pomerleau, the director of federal projects at the nonpartisan Tax Foundation in Washington. That developers can exchange one property for another encourages them to continue investing, he said, which benefits the economy overall. He also pointed out that banks pay taxes on the interest they receive from real-estate loans, and he argued there is no reason to tax the money twice.
These exemptions are available to firms in other industries as well, but the real-estate sector benefits more because of its extensive reliance on debt. "The real-estate industry looks different from other industries," Pomerleau said.
On the other hand, there are at least a few forms of favorable treatment in the industry that other industries do not enjoy, including one provision in particular that might have allowed Trump to report such unfathomable losses in 1995.
Most taxpayers can only claim losses as large as their own out-of-pocket investment in a business, excluding money provided by lenders. Many real-estate investors, however, are exempt from this rule, which effectively allows them to count other people's losses against their own income.
It is possible that Trump lost $916 million of his own money in the years leading up to 1995, but some of those losses might also have come at the expense of creditors who had loaned him money. If so, without the exception for real-estate investors, he would only have been able to claim a loss to the extent his own money was at stake.
Unless Trump releases more complete tax returns, it will be impossible to know whether and how much he has benefited from this exception.
"Why does the real estate industry get it and not other industries?" said Weingarten, the accountant. "It's very hard to explain to a person earning their salary and paying their taxes."
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