As Americans head to the polls I'd like to draw your attention to a running theme in my new book, The Liar's Ball: The Extraordinary Saga of how One Building Broke the World's Toughest Tycoons, an expose of the unruly dog-eat-dog world of high-stakes real estate, which, incidentally Donald Trump has said he doesn't want you to read.
The theme is legal tax-evasion -- by this country's very rich -- enabled and encouraged by both sides of the political aisle on Capitol Hill.
Let me explain. My book tells the story of the obsessive battle amongst this country's billionaires for the prize they want the most: America's most valuable office tower, New York's the General Motors Building. Every time the building went on the block my group of rich, powerful sellers shared one concern that overrode the rest: the desire to avoid paying what most wage-earners would consider normal a tax bill.
The quite amazing thing is -- time after time they achieved this -- perfectly legally!
I was staggered to learn that the federal government, anxious for the financial support of the vast real estate lobby in this country, allows the members of this industry grotesquely unfair tax "loopholes" that just do not apply to the rest of us. As I was researching the book my phone began to ring and ring as various industry bigwigs called to exhort me not to "get into this..." "We don't not pay taxes...we delay them," one of them said. Which is not quite true. If developers plan well there are plenty of example of people in my book who may pay almost no tax -- ever.
In my book I touch on two egregious examples of quite legal tax manipulation for real estate investors.
First there is the "depreciation" clause. When you and I buy a house -- we buy it in the expectation that it goes up in value and we expect to pay a capital gains tax on the appreciation when we sell it -- as a reflection of that rise.
Not so, if you are a heavy-hitter in real estate. An antiquated tax law that was created to apply to farm machinery that wears out over time, is applied to buildings bought for real estate investment. According to the tax laws in this country, investment buildings, no matter how much they really rise in value, "depreciate" to a value of zero over -- roughly 39 years allowing an investor to write off around $2.5 percent of the building's value per year. So even if a building appreciates by millions, the owner declares a tax-loss. In the eyes of the government it's lost its value. How is this even real -- let alone fair?
Second almost all the tycoons in my book avoided paying capital gains taxes by using a mechanism known as a 1031 exchange. You don't "sell" a building when you get rid of it if you are in real estate....What you really do, is you 'exchange" it either for a replacement property -- or if you aren't flush enough for that, because, say, the market turned and you were levered way up -- you can get shares "a sliver interest" in the acquirer's company....So even if, officially, you've gone bust and you've lost your building(s), the good news is the tax man isn't going to bother you too.
As all this got explained to me I couldn't help asking various tax lawyers: "How is this fair?" The resounding answer came back: "Don't tell anyone: It isn't." (I can't print the names of the men who said this -- or -- they'd be out of a job). So then I asked a couple of politicians (at private settings, else I'd tell you who they were) who told me that no one in political office rushes to address the admitted inequality and injustice here because 1) talking about the tax code isn't sexy and 2) why bite the hand that gets and keeps you elected: that would only help the opposition right?
To me a tax-code that enables the one percent to get richer while everyone else gets poorer isn't a small line-item to go to the back of the pile in an election year. It should be front and center. And if our politicians are not talking about it, we should make them. But that's just me.
Vicky Ward's The Liar's Ball: The Extraordinary Saga of How One Building Broke the World's Toughest Tycoons (Wiley) is on sale now.