The real estate giants that are undercutting the tax write-off, are paying a steep price for their greed. The only beneficiary is the owners of the real estate investment trusts (REITs) that buy up properties with the tax break. Real estate magnates like Richard LeFrak get a hefty tax break from the loophole as do real estate speculators like Michael Roth and David Boies.
Real estate investment trusts (REITs) are not unlike other investment trusts. You can put money in an IRA and pay in cash. REIT investors often buy and sell large portfolios of properties to the highest bidder at a rate of about $15.5 million per day each year. It is a low-cost way to have a very effective hedge on taxation. But, that same low-cost approach is being undercut by wealthy real estate speculators and real estate millionaires like LeFrak and Boies.
Today, more than 500 REITs own as much as $5 trillion in real estate holdings and are collectively worth more than $200 billion. They play the game of gaming Uncle Sam’s policy in order to give themselves a tax benefit while minimizing taxes that other investors could pay on the profits they reap. [A look at the state of real estate play by play for 2015, by Andrew C. Myers, LendEDU, May 27, 2015 ]
Real estate speculators have been allowed to pay a lower tax rate on returns than many small retailers and other small businesses. For the top individual earners, the tax rate has been dramatically slashed to just 15 percent. As for most companies and the middle class, the tax rate on interest, dividends and capital gains has been reduced to 15 percent, from 35 percent. [Exemptions for real estate investors, by Jeffrey Gheen, Wall Street Journal, June 30, 2015]
The real estate giant LeFrak, who owns three REITs and has also invested in a couple of tax shelters, has made the tax carveout a centerpiece of his business strategy for years. He’s managed to keep many of his investments off the table for years by making sure all his investments are located in his REITs that use the write-off. LeFrak says that in theory the write-off could benefit anyone who was investing at least $1 million in his REITs each year for the past decade [Huge real-estate tax write-off for billionaire LeFrak, by Tim Dickinson, Boston Globe, May 22, 2013]:
LeFrak says that in theory, a REIT could have a tax writeoff as long as its capital is invested in an REIT. In practice, however, the process is much more complicated and the rules are often less forgiving. LeFrak argues that his deals are always structured in such a way that an investment of more than $1 million won’t result in a write-off… LeFrak has an additional rule: Any property that he is buying is either owned by someone directly or indirectly through a trust or a non-trading REIT. A trust is a group of companies designed to hold assets of a particular value and allow individual members to pass on part of the value to their heirs. It is the equivalent of “trust” in the ordinary context, but it can also cover more complicated situations. That could include shares in a mutual fund or an individual holding company…. [The propertyin question] would have to meet LeFrak’s specific parameters for being exempted for the purposes of avoiding the tax… And he insists, that in all the hypothetical scenarios he has proposed, it pays lower tax rates than typical real estate. LeFrak is quick to note that a tax-advantaged financial vehicle, such as an REIT, is not necessarily a bad thing. And in some cases, LeFrak says, it can add tremendous value. In addition to his investments in tax-advantaged REITs, LeFrak manages a $17 billion portfolio as head of real estate-centric private equity fund, REIT Research, which he bought in March 2010 and sold last November. In a recent phone interview, LeFrak said that the tax benefit is an advantage for investors, not the real estate companies owning the investment trusts. For LeFrak, the interest deduction, for instance, is an enormous benefit. “I get to hold the asset, invest it with a low tax rate and be very comfortable on where my investments are.” LeFrak also said the deduction should be expanded for taxpayers using small-business income. The tax advantage for people working as independent contractors, however, is minimal. “This is the only issue on which the deduction is completely unavailable,” he said.
With the new deduction under the