What "bombshells" might lurk in Trump's tax returns?

What is lurking inside Donald Trump's unreleased federal tax returns? And if the Republican presidential front-runner used clever tax dodges, popular with other real estate moguls, would his political standing suffer?

His critics hope that the returns show he has paid little or no federal taxes, which hurt another wealthy candidate four years ago: Mitt Romney, then the party's nominee.

Ironically, it was Romney who declared Wednesday that Trump's tax returns likely contain a bombshell -- that the New York billionaire has not been paying enough taxes, is not as wealthy as he claims, or been as generous donating to veterans or the disabled as he says.

In September 2012, after Romney finally released tax documents following a delay, he took a political hit because he paid a lower rate than many Americans. The chief reason: Much of the wealthy businessman's income came from investments, which are taxed at a lower rate than salaries are.

During the Thursday night candidates' debate, Trump said he would make his filings available, but only after the conclusion of an Internal Revenue Service audit of the past "four to five years." The audit could take a long time, he said. If so, the disclosure would be after the crucial 12-state Super Tuesday balloting this coming week and other key contests.

Opponent Texas Sen. Ted Cruz, who said he had released his 2012-2014 returns, asked Trump why he couldn't disclose the tax forms from before the audit period. Trump, who claimed he had been audited for 12 years, did not reply.

Experts say that there is no legal bar to Trump's releasing returns being audited. A former IRS agent, Alan Olsen, told Bloomberg News that 12 years of audits is "highly unusual."

Whether a Trump disclosure of minimal or no taxes actually would harm his candidacy, of course, is hardly certain. Standard political rules don't seem to apply to him. Even his most outrageous statements have helped him among his fans. They seem to like that he is so rich because he can say he is not beholden to Washington power brokers for campaign contributions.

Trump has openly admitted that he uses tax strategies to reduce his load. Back in August, he said on CBS' "Face the Nation" that "I fight like hell to pay as little as possible." A request to his company for further clarification went unanswered on Friday.

In whole or in part, Trump owns office, residential and hotel buildings, as well as golf courses. How would he go about lightening or eliminating his tax liability on such properties? A common tactic in wealthy real estate circles is to use loans secured by assets as income. That was one method real estate developer Frank McCourt, former owner of the Los Angeles Dodgers, used to pay no federal or state taxes from 2003 to 2008. Money from loans generally are not taxed.

A second advantage: Trump's company, the Trump Organization, is a limited liability corporation (LLC), as are a number of its commercial-property-owning subsidiaries. (In all, he has 240 LLCs.) Tax-wise, an LLC has a leg up over a conventional corporation, where the government levies taxes at the company level and then taxes employees' personal incomes. An LLC, which pays out income to its owners, avoids this dual taxation: It is taxed just once, a boon for the owners.

The LLC structure also allows its owners to benefit from depreciation of their property -- an accounting feature that lowers the real estate's value over time and lets the owners take tax deductions on the decline (even though the assets likely are worth increasingly more on the open market). Further, owners get to deduct mortgage interest on income from tenants' rent.

Another stratagem is to turn a real estate asset into cash using a tricky shuffle that waters down a tax liability. Example: A commercial real estate owner, whose interest in a building is contained in a partnership, has the partnership borrow money equivalent to his stake. It allocates the money to a new subsidiary partnership, which then lends it to a bank, and the lender issues a note.

The partnership distributes its interest in the note-holding subsidiary to the owner. Later, when the note is paid off, the owner has the money free and clear. The taxes are deferred far into the future, and can be written off by paper tax losses that develop over time.

According to his Federal Election Commission filings, Trump has between $265 million and $425 million in mortgage loans outstanding. So he has a lot of borrowing power to play such a game. It's unclear whether Trump ever used that specific tactic, but the shuffle is in wide use among moneyed real estate operators.

Trump lists his net worth as $10 billion, although Forbes in its annual rankings of the richest Americans, pegs him at $4.5 billion. He vehemently disputes the magazine's assessment. To most voters, the difference between the two figures seems academic, yet to Trump the size of his wealth is a point of pride.

In the early 1990s, when he personally was on the line for his holdings' debt, he almost went bust during a real estate downturn. He learned his lesson and nowadays enlists other investors to provide financing for his projects. When his Atlantic City casinos took repeated tours through bankruptcy court, the fallout had no affect on Trump's worth because those investors were on the hook, not him.

A large part of his current business is to serve as a marketing consultant and property manager for others' developments, which carry the Trump name for sales appeal. He typically gets an equity stake in the properties.

Romney waited too late in the 2012 election cycle to divulge his tax returns. The same trap could bedevil Trump if he is the Republican nominee. But in light of his brazen nature, the public may never know what his taxes look like

  • Larry Light

    Larry Light is a veteran financial editor and reporter who has worked for the Wall Street Journal, Forbes, Business Week, Money, AdviceIQ and Newsday.