Former WeWork CEO Adam Neumann (Getty Images, iStock, Yard 8 Miami, Stacks on Main, Trulia, Power Design Inc., Inkwell Decatur, Wikipedia, Illustration by Kevin Cifuentes for The Real Deal)
When Adam Neumann was ousted from WeWork, he reportedly received nearly $200 million, plus company stock worth hundreds of millions more.
But with great purses comes great liability — tax liability, that is. Reducing it was surely a priority for the exiled co-founder, and the real estate he bought with his windfall figures to do just that.
Neumann’s purchase of a majority stake in a $1 billion-plus luxury rental portfolio can — with the magic of real estate tax accounting — shield a sizable portion of the former CEO’s payout. By depreciating his newly acquired holdings, Neumann could slash his taxable income by tens of millions of dollars every year for decades to come.
Depreciation is central to real estate investing. Everyone from mom-and-pop landlords to a certain U.S. president takes advantage of the tax principle, which presumes that things wear out and lose value over time — even if they don’t.
As residential rentals theoretically crumble, the tax man allows owners to deduct a portion, about 3.6 percent, of the purchase price. Owners of commercial buildings get to deduct slightly less. Land and personal property do not depreciate.
Bought a residential building for $27.5 million? Deduct $1 million from your taxable income each year.
With what Neumann paid for his apartment portfolio, that means trimming an eight-figure sum from his taxable income. And thanks to a special tax classification for real estate professionals, Neumann and his family may be able to shelter an extra $500,000 of his golden parachute. What’s more, he could exploit the latter loophole each year, provided that he remains a real estate professional. But that is not a shoo-in.
“The hurdles are not minimal to being considered a real estate professional,” said Donald Williamson, professor of accounting and taxation at American University.
The tax classification would be hard to achieve for anyone moonlighting as a property owner. Its strict requirements include spending half of one’s time on business related to real property, and at least 750 hours, in a given year.
“Most real estate professionals are agents or brokers who believe in the product, and work hard on a handful of properties they own,” said Williamson. The main barrier is that people often spend too much time doing other things.
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But Neumann’s inglorious exit from WeWork in 2019 left him with plenty of time on his hands, possibly clearing the way for him to achieve real estate professional status, or what New Jersey tax accountant Simon Filip described as “the golden ticket,” because it allows passive losses like property depreciation to offset other kinds of income, such as his WeWork walkout package or the $13.7 million he received for his Greenwich Village townhouse. Without being a real estate professional in the eyes of the IRS, however, passive losses like depreciation only offset passive income, such as rent.
The line between passive losses and active income was drawn by Ronald Reagan in 1986, when his Tax Reform Act kiboshed wealthy individuals’ game of buying real estate to offset ordinary income, explained Meyer Mintz, a tax accountant and partner at Berdon LLP. But real estate professionals have a unique ability to evade that limitation and claim passive losses against non-passive income.
Neumann, who became fabulously rich at the precise moment he lost his job as CEO, may yet become the real estate professional he always claimed he wasn’t.
“He’s likely not a real estate professional if he’s doing other [work],” said Williamson. “But if he’s a rich guy surfing in the Maldives and does [no work] other than real estate, he may easily be considered a real estate professional.”
The amenity theory
Speculation has swirled around Neumann’s plans for his family firm 166 2nd Financial Services, which has invested in proptech companies including Doorsey while Neumann buys up large swaths of apartments in and around cities such as Nashville, Atlanta, Fort Lauderdale and Miami.
One theory that’s been floated is that Neumann could load up his luxury apartment buildings with amenities and services to take advantage of another quirk of the tax code: Things inside a building — perhaps vending machines with matcha-infused mezcal or exercise bikes hooked up to universal consciousness — can be depreciated more quickly than buildings themselves, provided a cost-segregation company approves.
If installed in luxury apartment buildings in 2022, they could be depreciated to a cost-basis of zero in a single year through so-called bonus depreciation, according to Filip. Neumann could offset his taxable income further as a result.
A media consultant employed by Neumann questioned whether the ex-CEO would take depreciation on his properties, a suggestion that left Mintz incredulous. “That is not a thing,” the tax specialist said. “I’ve never seen anyone intentionally not take depreciation.”
Not depreciating assets is akin to burning money, an activity with which Neumann, in fairness, has some experience.