Of course, Jared Kushner isn't paying taxes

The New York Times tells us that Jared Kushner paid "little to no" income tax from 2009 to 2016. Yes, Kushner is very rich. But not paying income tax is actually pretty reasonable given that on the numbers presented, Kushner has been making a loss. We tend to try to tax positive incomes, not negative ones. That’s not how it’s presented by the New York Times, but it is the crux of the matter.

The details are here. The Guardian reliably supplies the outrage here. I'll explain what they don’t: On the numbers presented it’s quite right, at least in the economic sense, that Kushner isn’t paying income tax since he’s making that loss.

That crux of the matter is something that every homeowner understands — buildings eventually fall over. It’s necessary to repair this and that on an ongoing basis. Every so many years, some major expenditure is required: a new roof maybe, new windows, redo the air conditioning perhaps, or the heating boiler. It’s obvious from hard experience that we’ve got to do this.

Pretend you’re in business, that you own real estate and rent it out for a living. These costs, they’re part of the costs of being in business just as much as the food bill for a restaurant is. We obviously take the maintenance costs off gross revenue, just as we do the meat suppliers’, before we try to calculate the profit being made. It’s that profit that we want to tax, of course; we don’t tax on a revenue basis but on the profit.

Maintenance costs are thus obviously deductible. And yet, there's more than this. Buildings are, eventually, replaced.

That means any one building declines in value each year as it comes closer to that replacement date. This is depreciation. Just as a business buys a machine, that machine will decline in value over its useful life.

Which is exactly what Kushner is accused of doing. The only trick here is that much real estate business is conducted through partnerships, not corporations. Thus, the tax bills arrive with the individual investors, not the corporation itself. That’s why this depreciation allowance appears on his personal income tax return.

This depreciation is larger than his income in the years mentioned. Therefore, the tax allowance is higher than any tax owed — zero income tax bill. We can also describe the same thing another way. Kushner is consuming his capital. Those buildings are worth less each year; on a full set of accounts, he’s making a loss.

Democrats don’t like well-connected, smart and powerful people gaming convoluted tax law to maximize tax breaks?

Then give us a low, flat tax. zero deductions. No capital gains tax.

Everyone will be honest, most people will pay something and thus have a stake.

I’m Shocked, shocked I say! Tell me who doesn’t strive as hard as possible to have a zero tax liability? I might care if and when the Washington Examiner starts digging deep into the taxes of democrat politicians and their families......Clintons, Pelosis and Feinsteins anyone? Also take a look at the obscenely wealthy democrat donors, until then I will save my righteous indignation.

Then give us a low, flat tax. zero deductions. No capital gains tax.

I would say flat tax, but everyone gets a $10k deduction, and a $5k deduction per dependant. No other deductions.

Of course, this is just a step into a proper tax scheme - FedGov passes a budget, divide by 535, then each CongressCritter takes their share of the budget back to their state, which can raise the money however they see fit.
Tariffs go straight to debt payments until the national debt is evened out, at which time they are credited to the following year's budget. Also, 17th is repealed.

Kushner is not actually losing money - though depreciation makes it look like he is for tax purposes.

Yes, buildings depreciate - but if you maintain them (a deductible expense), then they really DON’T depreciate...but you still get the depreciation deduction.

Something not mentioned is that every few years, as you pay down a bit of your mortgage on a particular property and raise the rents, the valuation of your property goes up. This increase in value is NOT taxed...but you can go to a bank and get a loan for 80% of that higher valuation. Once you pay off what’s left of the old mortgage, you still have the property (which is cash flow positive), and then you have quite a pile of (non-taxable) money in your hands with which to buy another property. Oh, and even if you get rid of a property that appreciated, it isn’t a taxable sale if you do a Section 1031 (of the Internal Revenue Code) exchange and fold all of your equity into a newer and more expensive property.

Kushner is not stupid, nor is any other real estate investor who follows the pattern laid out above. Virtually no taxable income on a year-to-year basis, yet you have great cash flow and your properties appreciate without being taxed. That’s why he and his family (and Trump, and half of the Forbes 400) are wealthy.

“And when he goes to sell the buildings, he will have to recapture all the depreciation he is now claiming over their useful life.”

No, he won’t. You don’t actually “sell” a property, you do a Section 1031 exchange and fold your equity into another, more expensive (and, thus, more productive) property. There’s no tax, though the basis of your new property is that of your old property (including the depreciation taken) plus any new equity that you might throw into it.

Real estate investors only pay tax when they WANT to pay tax.

“Of course you don’t have to do a 1031 exchange, it is an option.”

Yes, that’s why I said that for real estate investors, paying taxes is an option.

For the benefit of others (because clearly you understand this stuff), this is why a lot of older R/E investors will do a 1031 out of apartments or commercial properties that need to be actively managed, into something like a Walgreens. They own the property, but it is bound to a triple net lease for X number of years, and Walgreens will have several 5 year options to extend the lease (usually with a 2% - 5% bump in the rent). There is no responsibility for the new owner to do anything but pay the mortgage (if any), pay property taxes and pay for insurance - all of which can be set up to be withdrawn electronically from a business account. No taxes on the “sale” and a predictable rate of return with virtually no risk.

If one has the money to invest, it isn’t difficult to make a lot of money in real estate - you just have to avoid the really big mistakes like not over-leveraging, not inspecting your property before purchase (including the rent roll), and not maintaining the property. Do those things, and you are pretty much set, especially if you have an accountant/tax advisor who is able to properly figure out that 2 + 2 = 4.

Remember a couple of weeks ago when all the media could talk about was ‘DEPRECIATION’???

It certainly would help the population in general if accounting basics / bookkeeping were taught as early as 9th grade. No kid today comes out of high school able to read a bank statement or to keep a check register correctly.

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