TALKING TAX REFORM - MORE ON THE DEPRECIATION DEDUCTION

If you want to talk about tax loopholes that disproportionately benefit the “wealthy” let’s take a look at the deduction for depreciation of real property.  See my post "A Controversial Tax Reform Idea".

 

Those in the higher brackets – 28% to 39.6% - get, at some point (the deduction may not be currently allowed but “suspended” to be deducted in the year of sale), an ordinary income deduction for a truly phantom expense – depreciation of real estate.  This deduction is merely a “loan” that must be paid back – referred to as “recapture” - when the property is sold.  But it is paid back at a maximum rate of 25%.  So, the net benefit is 3% to 14.5% on a non-existent expense.

 

As a general rule - to which, as with any rule, there are certainly exceptions – real estate does not “depreciate”.  It “appreciates”.  My father sold the home he purchased for $13,000 in the 1950s for $75,000 in the 2000s – and the sale price was too low.

 

Real estate is an investment, just like stocks, bonds, mutual funds, etc.  You invest in rental real estate because you expect the building to increase in value over time, often more so than stocks and mutual funds, and because it generates “dividends” in the form of net “in pocket” rental income.

 

The deduction for depreciation of real estate is like allowing those who purchase stock to depreciate the purchase price of the stock as a deduction against the dividends paid out.

 

Being a phantom expense, the deduction for depreciation of real estate distorts the true economic reality of the investment activity.  An activity producing a positive cash profit becomes a deductible tax loss. 

 

A good example is the truly huuuuuuge loss reported on the one tax return of arrogant idiot Donald T Rump that we have actually seen, almost a billion dollars, that caused him to avoid income taxes that year and potentially on several carryback or carryforward years, has been explained by many as the result of the deduction for depreciation on real estate.

 

If the cocktail napkin scribblings that is the “framework” for tax reform truly wants to do away with tax loopholes that benefit the wealthy it should include the deduction for depreciation of real property on the list. 

 

What do you think?

 

TTFN