“Just Like Trump, I Avoided Paying Federal Taxes” (nytimes) is an inadvertently interesting article. The author describes an asset purchased in 1987 and sold recently (after a 1031 exchange). He talks about paying taxes on 30 years of what the IRS considers to be capital gains: “I sold the building this year and owe the capital gains tax. Fine. … If you’re paying taxes, you’re making money.”
The owner of a 17-unit apartment building, he distinguishes himself from Donald Trump, not because Trump built the world’s 7th tallest building, but because he is more virtuous: “I’m like Mr. Trump that way. But I’m paying.” (he apparently has access to Trump’s tax returns!)
What’s the interesting part of this? It shows how Americans in the media business can’t think with numbers, especially when it comes to inflation. The BLS CPI calculator shows that $1,000 in 1987 has the same purchasing power as $2,120 today. If this guy bought an asset for $1,000 in 1987 and sold it recently for $2,120 he would owe substantial capital gains tax on an asset that, in real (inflation-adjusted) terms, was worth the same as 30 years ago. Thus it is plainly not true that “If you’re paying taxes, you’re making money.”
Nowhere in the article I get a figure for what the author gained from the sale — he might had a net gain above inflation.
@Federico, I think Philip is responding to the columnist’s assertion that “if you pay taxes, you’re making money.” Philip points out that you can pay taxes and still not have made any money, taking inflation into account.
Believe it or not the IRS does not automatically apply your tax loss carry forward deductions for you. It’s possible to have lost money hand over fist and still pay capital gains taxes if you’re dumb.
@Phil,
If he depreciated the building all those years, and if he sold the building for exactly what he paid for it all those years ago, he’s merely paying back the taxes that he got to take deductions for all those years. Calling it capital gains isn’t entirely accurate.
And as to your comparison to inflation, i.e. $1,000 in 1987 is worth exactly the same as $2,120 today, why shouldn’t inflation (of the property value) be taxed? He did “make money” although he only kept pace with inflation. If he had kept that $1,000 under a mattress since 1987, THEN he truly wouldn’t owe the IRS anything. Since he’d still have only $1,000.
The better way to view this is to say if his building value in dollars went from $1,000 par to $2,700, he simply kept pace with inflation. Hey, at least he didn’t keep the cash under his mattress!
If you think you can have an inflation credit added to our federal tax code, please forward the name and address of the lobbyist you plan to use and I will gladly make a contribution to his tab.
Mark: Most assets that are subject to capital gains tax, e.g., stocks, can’t be depreciated. And most assets that can be depreciated can’t later be sold for anything close to their initial purchase price. I’m going to assume that the banker quoted in the NYT article was not talking strictly about real estate.
Lobby for a capital gains tax to be indexed to inflation? That certainly would take a lot of the randomness out of the system (a quiet tax on capital where the rate depends on (a) the taxpayer’s ability to use 1031 exchanges and other complex mechanisms, (b) how high inflation happens to have been, (c) whether or not a taxpayer is forced to sell an asset due to, e.g., cancer, death, encounter with the family court system, etc. ). But I think on the larger scale it would be simpler to move a business to a country that already has an inflation-indexed capital gains tax system. Ireland is already a popular tax home for multinationals and they use inflation adjustment. See http://www.revenue.ie/en/tax/cgt/leaflets/cgt2.html ; Singapore has income tax rates that are half those of the U.S. and no capital gains tax at all (see http://www.sgs.gov.sg/The-SGS-Market/Tax.aspx ).