Tax authorities allow developers to subtract the cost of acquiring new property from their incomes over a fixed number of years, a process known as depreciation. In principle, depreciation represents the decay in value of the initial investment because of wear and tear, but in practice, the value of investments in real estate are often increasing even as they depreciate on paper.

“Generally speaking, depreciation has nothing to do with actual diminution of value,” Weingarten said.

In any given year, a developer might be earning money from renting the property, but reporting losses to the Internal Revenue Service because subtracting the costs of depreciation reduces income below zero.

Usually, if an investment gains in value rather than depreciates, the investor will pay taxes on the increase in wealth once she sells the asset. Real-estate developers, however, are often able to sell one property at a profit and purchase another one without paying taxes on the gains, a process that can be repeated over and over.