As Donald Trump’s Tax Return Shows, Tax Benefits Flow to Real-Estate Investors

These professionals enjoy exceptions to tax rules that typically limit the usefulness of deductions tied to losses for other kinds of investors

Racking up huge losses on a personal income-tax return, as Donald Trump apparently did in 1995, isn’t that tough if you reside at the highest levels of the real-estate world, thanks to the considerable benefits the U.S. tax code confers.

In part because of those benefits, real-estate businesses often are formed and taxed as partnerships or limited-liability companies, known as LLCs, rather than taxable corporations. That way, profits—and potentially juicy tax losses—flow directly to owners’ personal tax returns, allowing individuals to use those losses to minimize or eliminate years of future tax liability on other types of income.

Real-estate professionals also enjoy numerous exceptions to the tax rules that typically limit the usefulness of deductions tied to losses for other kinds of investors. That reflects the enduring influence the industry has in Washington, allowing it to hold on to specialized benefits originally designed to help developers and investors recover from severe downturns in the past.

Mr. Trump himself spoke of the law’s complexity, and the many ways he benefited, Monday in Pueblo, Colo. After calling tax laws unfair, he said he “legally used” those laws to his benefit. His familiarity with those laws, he said, made him “one who can truly fix them.”

Mr. Trump has proposed big changes to the tax code, but his campaign has put forward little so far that would address the enormous complexities he mentions or seek to limit the many provisions the real-estate industry enjoys.

Under some circumstances, real-estate business owners such as Mr. Trump can even take losses on properties that were highly leveraged through loans. That is despite rules that Congress created to avoid tax windfalls for business owners when their loans are written off or renegotiated.

While forgiveness of debt often counts as taxable income, experts say there are ways for sophisticated real-estate investors to postpone it indefinitely. One way is to forgo future deductions on other properties instead of owing current taxes on the forgiveness, said David Lifson, a certified public accountant with Crowe Horwath in New York who advises high-net-worth clients.

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