Sen. Bernie Sanders (I-Vt.) recently announced that he plans to introduce a bill during the next session of Congress that he claims will close the loopholes Donald Trump reportedly could have used to avoid paying federal taxes for 18 years.
“Special tax breaks and loopholes in a corrupt tax code enable billionaires and powerful corporations to avoid paying their fair share of taxes while sticking the burden on the middle class,” Sanders said in a press release. “It’s time to create a tax system which is fair and which asks the wealthy and powerful to start paying their fair share of taxes.”
What Are the Loopholes?
According to the press release, there are four main “loopholes” Sen. Sanders is looking to close — exemption for real estate from passive loss rules (section 469), exemption for real estate from at-risk rules (section 465), like-kind exchanges (section 1031), and debt and depreciation — as these tax breaks are likely what “made it easier for [Trump] to claim losses of $916 million in the 1990s and avoid paying income taxes in subsequent years,” according to the release.
“Maybe he has a book about his plans for each, but it sounds like he’s just saying just get rid of these,” Jared R. Callister, an attorney at Fishman Larsen & Callister in Fresno, California, who focuses on real estate transactions and taxations, said. “I don’t see the benefit of that. Maybe he can modify the rules … to make it a middle ground.”
What Does This All Mean?
Callister broke down each of the items Sanders is hoping to change when Congress meets again in 2017, starting with the passive loss rule. He said this allows real estate developers to offset their losses with income they earn from other sources. In Trump’s case, that would mean he could balance out what he loses investing in real estate with the income he gets from non-real estate projects, like book royalties, TV appearances or endorsements.
“I think there is an argument to re-examine if we want professional real estate developers to benefit the way that they do,” Callister said.
In terms of real estate exemptions for at-risk rules, Callister said he thinks Sanders has “some good arguments there,” as this currently allows real estate investors to claim losses that are more than what they invested.
The like-kind exchanges law allows people to defer paying taxes on money made from property sales, assuming the person uses the money to purchase another property, Callister explained.
“The reason Congress put that in place is because they don’t want people to be hesitant to buy and sell property,” Callister said. “They think property changing hands is better than forcing someone to hold onto it because they don’t want to pay the taxes.”
He did note that if this law is changed, it could hurt farmers, as “you’d have farmers stuck holding land they don’t really want because they don’t want to pay the tax, but as long as they buy another real property, they get to defer the tax. It’s a delay and deferral of [paying a] tax, not avoidance of it.”
The debt and depreciation regulation is the item Callister said is baffling to him.
“I don’t know why [Sanders] would challenge that,” Callister said. “It doesn’t make any sense to me. If you borrow money and pay interest on the debt, I don’t know why you wouldn’t be able to deduct your interest.”
However, Callister said that the thing most notable about Sanders’ announcement is the “glaring omission” of the Net Operating Losses rule that predominately helped Trump get out of paying a large portion of taxes.
Representatives from Sen. Sander’s team did not immediately respond to Credit.com’s request for comment.
Paying Your Taxes
We are still several months away from Tax Day, but that doesn’t mean you shouldn’t be thinking about what you may have to pay. It is a good idea to have some money set aside just in case you do end up owing the IRS come April 15. Owing on your taxes doesn’t necessarily affect your credit, but how you choose to pay them might. For example, if you take out a personal loan or charge the bill to your credit card, these things will most likely be reported to the credit bureaus. You can see how your credit is being affected by these and other financial habits by viewing a snapshot of your credit report for free, updated every 30 days, on Credit.com.