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Some one that works with me told me about a wealthy person that owns a lot of large buildings in our city. He said the guy would rather keep the buildings empty and is using the empty buildings as some kind of tax deductions or tax incentive. I didn't understand how an empty building can make some one cash. Could some one please explain how owning a building and doing nothing with it and letting it rot makes you cash or reduces taxes? I don't understand how this is possible or if it really is possible. Is this some kind of crazy tax loop? Can anyone do this?

Location: Albany New York

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A real estate business could offset income from occupied property with costs from vacant property held for speculation.

For speculation, you can let a building rot, then get it reassessed. If the jurisdiction assesses part or all of the tax bill on the value of improvements, this can drop the annual tax bill significantly while you hold. If you plan to hold for a decade or more, this can be very important. Strategically, this also ruins the neighborhood property values, so you can assemble neighboring parcels to support future major developments.

This is a long speculation game. Exemplars of the strategy include Richard Basciano who bought up several buildings in NYC's Times Square and installed adult theater tenants in the 70s, for payoff today; and the late Sam Rappaport who pursued a strategy of squeezing rent and simply ignoring building inspection violations in Philadelphia, assembling major urban core parcels on the cheap, and whose children are now selling into strong markets.

Legality: Adult businesses are kind of a grey market covered by specific local ordinances, neither exactly illegal or perfectly legal. Ignoring building violations is not legal, but the penalties are fines, not jail. It's certainly not a "nice" strategy.

Richard Basciano: http://www.nydailynews.com/new-york/porn-king-richard-basciano-survived-rudy-giuliani-plans-risk-article-1.319185

Sam Rappaport: http://www.bizjournals.com/philadelphia/stories/2002/08/05/focus13.html?page=all

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    +1 for specific examples and the long-term, large scale view of the effect on the whole neighborhood. – Karen Jun 12 '15 at 17:47
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    Sounds like this is common practice in many developed municipalities. Would that be a correct assumption? – Patrick W. McMahon Jun 12 '15 at 18:18
  • Patrick: it's not impossible to find engineered blight in some neighborhood gentrifications, but I don't know if I would call it common. Most developers don't have the long game commitment of these old dudes. On the legit business side of land speculation, self storage companies make strategic multidecade investments in land and operate a profitable business in the mean time with an inexpensive building – user662852 Jun 12 '15 at 19:47
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This doesn't sound very legal to me.

Real estate losses cannot generally be deducted unless you have other real estate income. So the only case when this would work is when that person has bunch of other buildings that do produce income, and he reduces that income, for tax purposes, by deducting the expenses/depreciation/taxes for the buildings that do not.

However, depreciation doesn't really reduce taxes, only defers them to the sale. As mhoran_psprep said - all the rest of the expenses will be minimal.

  • What do you mean by "defers them to the sale" – Patrick W. McMahon Jun 12 '15 at 14:23
  • When you sell the property, the portion of the gains up to the amount depreciated is taxed at flat 25% rate. If you sell at loss - you get the tax break, but... you sell at loss. – littleadv Jun 12 '15 at 14:42
  • How would that be beneficial to the seller to sell at a loss? – Patrick W. McMahon Jun 12 '15 at 15:08
  • @PatrickW.McMahon reduce gains from elsewhere? – littleadv Jun 12 '15 at 22:20
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If the building has no income, it also probably has minimal expenses. The heat, water and electricity costs are nearly zero. They are letting the value depreciate, and taking it off the taxes. I also suspect the condition of the building is poor, so any effort to make the building productive would be very costly.

Many cities combat this by setting the tax on empty buildings or empty lots at a much higher rate. Or they set the value of the property at a high valuation based on what it could generate. Sometimes this is only targeted at some sections of the city to encourage development. They also offer tax breaks when the owner of a house has the house as their principal residence.

  • So is the tax deduction worth more then the amount of taxes they would pay to the city? – Patrick W. McMahon Jun 12 '15 at 14:21

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