Real-estate developers get huge deductions of paper losses that help reduce their tax bills, and the losses are magnified by the leverage they typically take on most purchases.
The main such deduction stems from the Internal Revenue Service’s determination of the useful life of a building. A typical commercial property, according to the IRS, can last 39 years. In return, the IRS allows the building’s owner to take a loss of 1/39th of the building every year. So for a building that costs $10 million -- not including the land underneath it --the developer could take a loss of more than $256,000 every year and count that against his or her other income, even if it has nothing to do with the building.
The more debt a developer has, the stronger the effect, said Gary DuBoff, a principal in the tax and accounting department for MBAF, an accounting firm in New York. Even if the developer only invested a fraction of his own money in the property and borrowed the rest, he still gets to take depreciation on the entire $10 million purchase. The interest expenses on his mortgage are also deductible.
The main such deduction stems from the Internal Revenue Service’s determination of the useful life of a building. A typical commercial property, according to the IRS, can last 39 years. In return, the IRS allows the building’s owner to take a loss of 1/39th of the building every year. So for a building that costs $10 million -- not including the land underneath it --the developer could take a loss of more than $256,000 every year and count that against his or her other income, even if it has nothing to do with the building.
The more debt a developer has, the stronger the effect, said Gary DuBoff, a principal in the tax and accounting department for MBAF, an accounting firm in New York. Even if the developer only invested a fraction of his own money in the property and borrowed the rest, he still gets to take depreciation on the entire $10 million purchase. The interest expenses on his mortgage are also deductible.
