Former President Donald Trump’s recent legal troubles have brought to light the complex interplay between civil fraud penalties and tax law. According to a recent Newsweek article, Trump may face significant financial issues if he chooses to sell his assets to pay his civil fraud fine.
The New York Attorney General (AG) could begin seizing some of Trump’s assets and properties if he fails to come up with a bond amount by March 25. This follows a ruling that Trump must pay approximately $464 million in penalties for fraud. The lawsuit, initiated by New York AG Letitia James, alleges that Trump and top executives at the Trump Organization inflated the value of his assets to secure more favorable terms from lenders and insurers.
If Trump decides to sell off some of his real estate empire to pay the penalty, he could face substantial capital gains taxes. Jim Seida, an associate professor at the Mendoza College of Business, University of Notre Dame, explained to Newsweek that any gains from asset sales would generally be subject to federal capital gain taxes, most likely at the 20 percent tax rate. The federal net investment income tax of 3.8 percent would also apply, resulting in a combined federal tax rate of 23.8 percent on any gain.
Steven Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute, suggested that it would be more tax-efficient for Trump to borrow against his properties than to sell them. This is because long-held properties typically have a market value much greater than the cost basis, and a sale would trigger tax. However, given the allegations of overstated property values, Trump may face difficulties in finding lenders willing to lend to him.
If Trump fails to make the payment, AG James has indicated her readiness to begin seizing Trump’s properties around New York. This case serves as a stark reminder of the severe financial and legal consequences of tax evasion and fraud. It underscores the importance of complying with tax laws and the potential repercussions of failing to do so.