How Donald Trump Uses the Tax Code in Ways You Can’t.

The New York Times reported last week that Donald J. Trump had a $916 million net

operating loss on his 1995 tax returns, which could have legally allowed him to avoid federal

income taxes for nearly two decades. That figure may seem startling, but wealthy real estate

developers like Mr. Trump enjoy federal income tax breaks largely unavailable to typical homeowners.

ADVANTAGE 1: BORROWING TOBUY

When Mr. Trump purchases an expensive piece of real estate — say, a New Jersey casino, a Las Vegas hotel or a historic skyscraper in the financial district of Manhattan — he often uses little of his own money, and the interest he pays on the loans is tax deductible.

Through the mid-1990s, Mr. Trump often borrowed heavily from banks and other investors. In the case of the Trump Taj Mahal casino in Atlantic City, his company issued $675 million in high-interest junk bonds to acquire the property and finish construction.

ADVANTAGE 2: LEGAL OWNERSHIP STRUCTURES

Real estate investors like Mr. Trump generally control properties through limited partnerships or similar ownership structures. This allows the profits and losses to be treated as individual income, while shielding Mr. Trump from lawsuits and from personal liability for the corporation’s debt.

It also means that business losses can be used to offset other personal income from taxation. When his Atlantic City casinos began to fail in the early 1990s, Mr. Trump could have deducted the full value of his businesses’ losses against his income, even though most of themoney invested in them had been borrowed.

ADVANTAGE 3: DEDUCTING WEAR AND TEAR

As soon as one of his properties opens, Mr. Trump can deduct a set percentage of its value each year in a process calleddepreciation.

In the case of a billion-dollar casino, that could be more than$25 million per year in deductions, until the entire purchase value has been recovered around 40 years later, according to Bradley T. Borden, a professor at Brooklyn Law School whospecializes in real estate taxation.

Mr. Trump can also use cost segregation to separate the value of the building’s components — such as the gilded bathroom fixtures and marbled interiors — from the value of the building, and depreciate them on an even more aggressive timetable.

Mr. Trump is allowed to take full advantage of these deductions to offset any of his personal income because he qualifies as a real estate professional, someone who spends at least 750 hours a year and more than 50 percent of his time working in real estate.

Most homeowners are not allowed to deduct the depreciationof their home.

ADVANTAGE 4: NET OPERATING LOSSES

The real estate industry stands apart in the sheer scale of the amount of borrowedmoney it can take to make a deal, which increases the size of the potential losses for a developer like Mr. Trump. Exceptionally big losses can be used to avoid taxation for years. If Mr. Trump’s business losses, combined with his other deductions, exceed his income, he produces what is known as a net operating loss.

This type of loss, the same as a $916 million loss that Mr. Trump reported in 1995, is useful because it can be carried forward for the next 20 years (before 1997, it was 15 years) and used to avoid paying income tax on his future income — like the more than $200 million he claimed to have earned by appearing on the NBC television show “The Apprentice.”

ADVANTAGE 5: CHAPTER 11 BANKRUPTCY

Mr. Trump’s businesses have filed for Chapter 11 bankruptcyseveral times. Unlike a Chapter 7 bankruptcy, which would liquidate a business, a Chapter 11 bankruptcy places its debts on hold while the business negotiates a restructuring plan with its lenders.

Mr. Trump characterized the choice to repeatedly file for Chapter 11 bankruptcy as a smart business move, saying in aninterview with Forbes, “Basically, I’ve used the laws of the country to my advantage.”

During negotiations, Mr. Trump has used the threat of years in bankruptcy court to force his lenders to forgive some of his debt, allow longer and more forgivingpayment terms, and provide him with additional loans to keep the properties afloat.

Normally, debt forgiveness would be taxable income. But there are several ways he might be able to reduce or eliminate it.Some real estate owners can take advantage of a special provision to avoid paying this tax by forgoing future depreciation deductions.

ADVANTAGE 6: TIME TO SELL

For most investments, selling at a loss counts as a capital loss, which can only be used on your taxes to offset capital gains and a small amount of income.

But through a provision in the tax code, thesale of business real estate is counted as an ordinary loss instead. So if Mr. Trump had sold a casino at a large loss, 100 percent of the loss could be used to offset his income taxes, or added to his net operating loss to carry forward to future years.

ADVANTAGE 7: FLIPPING REAL ESTATE

Let’s say that Mr. Trump sells at a gain. If he quickly reinvests the proceeds from thesale into a new piece of real estate, it qualifies as a like-kind exchange. This would allow him to delay paying taxes on the gain until he sells the new property. If that sale is also a like-kind exchange, Mr. Trump could continue to defer the taxes.

This can go on as long as Mr. Trump continues to do like-kind exchanges. If the proceeds continue to be reinvested in real estate until Mr. Trump dies, all income taxes on the accumulated gains between the depreciated value and thesale price will vanish.

THE BOTTOM LINE

All of these tax advantages are legal optionsavailable to real estate developers under the current federal tax code. The extent to which they helped Mr. Trump build his fortune by contributing to the $916 million net operating loss shown in his 1995 records might never be fully understood unless he chooses to release his tax returns.