Tax losses have become a hot property in sports M&A

Joshua Kushner and Bob Iger are reportedly nearing a record $12.5 billion deal to acquire the Los Angeles Lakers, a transaction highlighting the increasing trend of wealthy individuals investing in sports franchises, largely due to significant tax advantages. OpenAI CEO Sam Altman characterized Kushner as someone who makes "high-conviction bets," and this move into sports ownership appears to be one such bet, leveraging tax codes that allow owners to significantly reduce their taxable income.

Sports team ownership provides a "powerful tax shield," according to Ram Ahluwalia of Lumida Wealth Management. This benefit comes primarily from the ability to amortize intangible assets over 15 years, which for sports teams can constitute 90% or more of the purchase price. These intangible assets include player contracts, media rights, and goodwill. For instance, a $10 billion team acquisition, with 90% amortizable, could generate $600 million annually in write-offs, leading to cumulative tax savings of $3.3 billion over 15 years at a 37% federal tax rate. This allows owners to offset personal and business income from non-sports sources.

While the IRS previously capped write-offs for team owners at 50% of the purchase price, the American Jobs Creation Act of 2004 expanded this to include all intangible assets, pushing the potential write-off to 90% or higher. This tax strategy is not unique to sports but applies to all businesses, essentially acting as a tax deferral. Notable examples include Steve Ballmer, who reported $700 million in losses from his Clippers ownership between 2014 and 2018, offsetting income from Microsoft dividends. Similarly, Mark Cuban successfully used depreciation to transform high income tax into lower-taxed capital gains during his ownership of the Dallas Mavericks.

Recent high-profile transactions underscore this trend. Vinod Khosla's agreed purchase of the Seattle Seahawks for $9.61 billion is set to yield a record tax break for an NFL sale. Other significant deals include the $6.05 billion sale of the Washington Commanders in 2023 and the $4.65 billion acquisition of the Denver Broncos in 2022. The ability to depreciate assets like franchise rights, media rights, and even stadium infrastructure, coupled with the long-term appreciation of franchise values and stable revenue from broadcast deals, makes sports teams an attractive investment for the ultra-wealthy, despite recent IRS scrutiny into sports industry losses.