Donald Trump has taken a lot of heat over the years about his income taxes or, more specifically, his ability to get out of paying what most would consider his fair share.
Trump has kept 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 only paid $750 in federal income taxes in 2016 and 2017 — less than the average of $819 paid by households making over $20,000 per 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 obligation to almost nothing.
Benzinga hasn’t seen Trump’s tax returns and cannot verify the facts reported by the Times. However, assumptions can be made based on Trump’s largest business venture — his real estate holdings.
Real Estate Tax Benefits
Real estate offers some unique tax advantages, mainly the ability to write off depreciation against income. It’s common for a real estate investor to show a loss on their income tax return while receiving positive cash flow for the year.
Fractional real estate investors also receive similar benefits. The investment platform Arrived Homes, known for letting investors buy shares of rental properties with 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 nontaxable return of principal.
That means Arrived 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 come tax time next year.
Another likely reason for Trump’s low tax bills is the use of a tax loss carryforward. Companies such as The Trump Organization can carry losses over from one year to offset taxes in subsequent years. Trump used this strategy after realizing nearly $1 billion in losses in the early 1990s. He was able to carry those losses over each year until 2005.
How Individuals Use This Tax Strategy
Individual real estate investors use Trump’s tax strategy every year, which is one reason real estate is such a popular asset class. Investors can even take advantage of these tax benefits without having to purchase their own property.
Passive investments as a limited partner through private equity real estate can provide many of the same benefits. Individuals who take part in a crowdfunded offering will receive a K-1 tax document each year, which shows the investor’s share of net income or loss after deducting expenses like depreciation.
Fractional investment platforms like Arrived Homes simplify the tax preparation process by sending out a single 1099-DIV tax form each January. The form summarizes the taxable income for each investment held on the platform, eliminating the need to add up all of the deductions.
Related: Browse Private Equity Real Estate Investment Offerings on Benzinga Alternative Investments
It’s important to understand that each individual’s situation is different when it comes to income taxes and not all private equity real estate investments have the same pass-through tax structure. It’s 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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