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Tax Change in Stimulus Package Could Hand Billions to Real Estate Investors

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Tax Change in Stimulus Package Could Hand Billions to Real Estate Investors

2020-03-27 10:03:13

By Laura Tucker, Staff writer; Image: New York City skyscrapers (Image source: Philipp Henzler via Wikimedia Commons)

Late Wednesday the Senate passed a landmark stimulus package meant to jumpstart the economy that was failing during the coronavirus epidemic. It now seems the $2 trillion package includes a potential windfall for the richest real estate investors in the country.

The stimulus package was hotly contested in the Senate. While Senate Majority Leader Mitch McConnell (R-KY) expressed that it would be passed quickly, it took nearly a week, as the Democrats felt it was more beneficial to businesses than workers and families. Eventually, a deal was passed, and later that night the Senate passed it.  

While there wasn't much known about the contents of the stimulus package, it has now been learned that a provision was added by Republicans that allows wealthy investors to use real estate losses to minimize taxes on profits from investments, the stock market, etc. It's estimated the cost of the charge is $170 billion over 10 years.

Under current tax code, when real estate investors experience losses from depreciation, they can use some of that to offset other taxes. This allows them big tax breaks on paper losses. Even if the investor has steep profits, they can still profit on only-on-paper losses. 

The use of those losses was limited by the tax cut package Trump backed in late 2017. Similar to capital gains from investments, the losses could only help shelter the first half million of the nonbusiness income for a married couple. Losses that aren't used get rolled over to use at some time in the future.

The stimulus lifts that restriction for a total of three years: this year and two retroactive years, which takes care of the losses being limited since 2018. It helps couples who make more than $500,000 in annual capita. gains or income from other sources that don't include their business. The top 1 percent of taxpayers are affected by this. 

A draft congressional analysis targeted the policy change as the second-biggest tax giveaway in the stimulus package. There are also smaller technical changes to the law in the package. Real estate isn't the only industry profiting. Oil and gas and commodities will profit as well.

"It's a pretty big deal," said Peter Buell. He runs tax services for the accounting firm Marcum's real estate practice. There's also an additional provision in the stimulus package that removes restrictions on losses that people carry over from previous years, increasing the benefit for those real estate investors. 

A spokesman for lobbying group Real Estate Roundtable didn't see the importance of the change. He noted that under the 2017 law, some real estate investors just spread their losses over multiple years, thereby avoiding the $500,000 maximum.

It's not surprising that real estate investors that may benefit from this rule charge are in Donald Trump's inner circle. The New York Times reported in 2018 that his son-in-law and adviser, Jared Kushner, most likely didn't pay federal income taxes for many years because of paper losses from depreciating the properties in his companies, even though he has great earnings from separate sources, according to financial documents. 

Trump is also known to have reported significant losses on a tax return. The Times published portions of a 1995 tax return where Trump showed almost $916 million in losses. This could have allowed him to avoid paying federal income tax for nearly two decades.

The tax change in 2017 restricted both Trump and Kushner from profiting through their paper-only losses. With the stimulus package lifting those limits, they could profit in a really big way. 

The House is expected to vote on the stimulus package on Friday.

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