I try to keep my blog from being too political, but I sometimes can’t help myself, especially regarding Trump or Netanyahu. I am not sure this post is that political. It attempts to explain why bankruptcy could be in Trump’s future.

Trump made his fortune at first from real estate and later as a TV celebrity. His financial empire (I am sure he would like that term) is extremely and purposely complex. So I have to guess at several things.

Making money in real estate is very different from making money via a career, building an operating company, or investing. That is because of tax breaks related to real estate investments, namely depreciation.

Let’s say you buy an apartment building for 100 million dollars. The land is appraised at $20 million. You can deduct about 3.5% of the remaining $80 million for depreciation each year, which means you can deduct about $3 million from taxes due from renting units. It is possible that someone with a significant net worth (or at least alleged). Could borrow all the money so there would be interest that would have to be paid. Let’s use 4% or $4 million a year. Interest is real money that goes out the door, unlike depreciation. By the way, the depreciation in the early years could be significantly higher as various items can be written down faster. There would also be management fees, etc. For the sake of our discussion, let’s assume that the property breaks even from a cash flow perspective initially.

Over the years, the property has Message property increased in value. So, in ten years, it is worth $150 million. So what do we do? We raise the rents and refinance, allowing us to take out $50 million in profit. But since it is a loan, we do not have to pay taxes. We did not have a realized gain, allowing someone like Trump to live large without paying taxes.

Now, given that the investments are in a limited liability company owned by one person, the properties are marked to market if that person dies, and no capital gain taxes are due. There are ways to avoid the recapture of the depreciation. This method is one of the ways wealthy people can pass on large inheritances without estate tax.

All this works unless the property is sold (which can be avoided if exchanged). In that case, the gains are taxed as capital gain, and the depreciations are recaptured and taxed as ordinary income.

So if Trump has been doing this, and I suspect he has, he could be in big trouble if he was forced to sell his properties. In that case, he would have a capital gain on the gain from his original purchase price and the recapture of the depreciation. If he has been using the gains to support his lifestyle without consideration of tax, he could find himself bankrupt.

Why would he be forced to sell? Banks may revoke his loans if they find out he was dishonest in reporting his net worth and convicted of felony charges. Once one bank calls his loan, the other banks will follow because they don’t want to be last.

https://www.politico.com/news/2023/08/30/trump-net-worth-fraud-trial-00113541