Tag: Carried Interest

What’s Ahead: Reconciliation Talks on Capitol Hill

Posted on by abigail_grenadier

Congress will return to Washington next week with an ambitious agenda—kicking off markups for a sweeping reconciliation package that would enact the President’s legislative agenda and could shape the fiscal and tax landscape for years to come. (CBS, April 24)

Markup Schedule

  • The Judiciary, Homeland Security, and Armed Services Committees are expected to lead the process starting the week of April 28. These panels have jurisdiction over spending on border security and defense and are tasked with allocating $110 billion, $90 billion, and $100 billion respectively under the House budget resolution. (Politico, April 17)
  • The Energy and Commerce Committee is targeting May 7 for its markup. The committee is required to find $880 billion in savings, which may involve changes to Medicaid, electric vehicle mandates, and other policy areas. (Punchbowl News, April 23)
  • The Financial Services Committee is set to vote on April 30 on its share of the reconciliation package, which must include a minimum of $1 billion in cuts over 10 years. (PoliticoPro, April 23)
  • Speaker Mike Johnson (R-LA) and Senate Majority Leader John Thune (R-SD) have expressed a shared goal of advancing the reconciliation package by Memorial Day.
  • “We are pushing it very aggressively on schedule, as you said, to get it done by Memorial Day,” Johnson said this week, citing the need to tame stock market instability.
  • Johnson also said he and House Majority Leader Steve Scalise (R-LA) had a conference call with the 11 House GOP committee chairs on Wednesday to discuss the next steps for Trump’s “big beautiful bill.” (PoliticoPro, April 23)

Tax Policy

  • Tax legislation will be a cornerstone of the reconciliation package as lawmakers prepare to extend the major tax provisions from the Tax Cuts and Jobs Act (TCJA) that are scheduled to expire at the end of 2025. (PoliticoPro, April 14)
  • The House Ways and Means Committee is eyeing a potential two-day markup session on May 12 and 13. (PoliticoPro, April 24)
  • House GOP leaders, including Ways and Means Committee Chair Jason Smith (R-MO), are scheduled to meet Wednesday with blue-state Republicans to discuss the personal SALT deduction cap.
  • The meeting marks a key moment in resolving one of the most politically sensitive issues in the tax bill. While most Republicans support maintaining the current $10,000 cap, several GOP lawmakers from high-tax states have threatened to oppose the package unless the cap is raised to at least $25,000. (Punchbowl News, April 25)
  • As policymakers prepare the first major tax bill since 2017, The Roundtable (RER) and the real estate industry are focusing heavily on preserving the full deductibility of business-related property taxes. The deductibility of business-related state and local income and property taxes has emerged as a central issue as lawmakers look for ways to pay for new tax provisions.
  • A cap on the deductibility of property taxes paid by U.S. businesses could have devastating consequences for commercial real estate owners, developers, and investors nationwide, reversing the benefits of the 2017 tax bill and raising effective tax rates on real estate to 1970s-era levels near 50%.  (RW, April 11) 
  • State and local property taxes represent 40% of the operating costs of U.S. commercial real estate, a greater expense than utilities, maintenance, and insurance costs combined.  RER urges its members to weigh in with Members of Congress against restrictions on deducting state and local property taxes.
  • Other important issues for real estate in the current tax discussions include: tax parity for pass-through businesses, potential tax increases on carried interest, preservation of the opportunity zone tax incentives, and a possible expansion of the low-income housing tax credit.  (Bloomberg, April 21)

Potential Challenges Ahead

  • The reconciliation effort faces serious political hurdles, particularly regarding spending cuts and revenue-raising provisions.
  • House Republicans have a narrow majority, and leadership must secure support from nearly every member of their caucus. Proposed cuts to Medicaid and SNAP could generate pushback from moderate Republicans, while debates over “payfors” continue to divide lawmakers.
  • The House and Senate are also operating under different reconciliation instructions, which could further complicate aligning final legislation.

IRA & Energy Tax Credits

  • Since budget negotiations began, Republican leadership has suggested repealing some or all of the Inflation Reduction Act’s (IRA) clean energy tax credits as a way to reduce federal spending. However, several GOP lawmakers have advocated preserving specific provisions that benefit their constituents. (Reuters, April 21)
  • In a recent letter to Leader Thune, four Senate Republicans urged a more selective approach to scaling back the IRA’s tax provisions. Additionally, 21 House Republicans expressed their support for maintaining energy incentives that benefit both traditional and renewable energy sectors in a March letter to House Ways and Means Chair Jason Smith (R-MO). (Newsweek, April 21)

RER at the Forefront

  • This week, RER President and CEO Jeffrey DeBoer appeared on the special webcast  “Real Recession Risk or Temporary Distraction?” hosted by Marcus & Millichap President and CEO Hessam Nadji. DeBoer joined Moody’s Analytics Chief Economist Mark Zandi to discuss recession risks, inflation, and the broader impact of trade and tax policy in Washington. (Watch)
  • DeBoer was also a keynote speaker at the University of Wisconsin-Madison’s James A. Graaskamp Center Spring Board Conference earlier this month, where he shared his insights on how the Trump administration’s economic agenda, regulatory changes, tariffs, and tax policy are impacting commercial real estate.

RER will continue to monitor developments closely as Congress advances a package that could have far-reaching implications for commercial real estate, business taxation, and economic growth.

New Report: Carried Interest Tax Hike Threatens Jobs, Innovation, and Housing

Posted on by abigail_grenadier

A new report released this month warns that proposed tax increases on carried interest could significantly harm the U.S. economy, increase the federal deficit, and jeopardize millions of jobs.

Report Findings

  • “This report is a testament to the importance of backing up policy recommendations with sound calculations and analysis before making decisions that would affect so many American workers, small businesses, and industries,” said Dr. Swenson. (One-Pager)
  • The report warns that increasing taxes on carried interest would result in:
  • Higher Federal Deficit: Raising taxes on carried interest could cost the U.S. government up to $70 billion in lost revenue over the next decade.
  • Job Losses: Real estate, venture capital and private equity partnerships support an estimated 32 million American jobs. The private sector could lose an estimated 1.23 million jobs as businesses lose access to a critical tool for attracting capital and securing investment.
  • Global Competitive Disadvantage: The proposed tax increase would raise the U.S. tax rate on many businesses and investments to 40.8% – higher than China, Canada, and numerous European countries, discouraging foreign and domestic investment.
  • Worsening Housing Crisis: Higher taxes could exacerbate the current housing shortage, stalling construction at a critical time when the U.S. needs 5.5 million new units to meet demand.
  • Declining Innovation: Removing the tax incentive alignment between entrepreneurs and investors would shift investments away from high-risk opportunities, particularly in high-tech and biotechnology industries.
  • Lost Retirement Earnings: Public pension funds supporting over 34 million workers could lose up to $520 million annually as they’re forced into lower-yielding investments.

Industry Response

  • Industry leaders reiterated the report’s findings and warned of the harmful economic consequences of increasing taxes on productive, job-supporting investment. (Press Release, April 8)
  • Since carried interest and its tax treatment first emerged as a controversial political issue in 2007, RER has consistently opposed legislative proposals to tax all carried interest at ordinary income rates. (Axios, March 24 | NYT, March 8)
  • President Trump revived calls to close the “carried interest tax deduction loophole” earlier this year during meetings with Republican lawmakers, framing it as a potential revenue offset. While he hasn’t mentioned it publicly in recent weeks, the issue remains part of broader GOP tax discussions. (Politico, April 25)
  • In March, a coalition of 17 national real estate organizations wrote to congressional leadership urging preservation of current law on carried interest, highlighting that taxing all carried interest as ordinary income would raise taxes on 2.2 million real estate partnerships and nearly 9.7 million partners, potentially stalling new housing, infrastructure, and redevelopment projects. (RW, March 28)
  • Jeffrey DeBoer, President and CEO of RER: “The new study by Professor Swenson is further evidence that recharacterizing this long term ‘carried interest’ capital gain as ordinary income would penalize entrepreneurs, slow housing production, and reduce investment in long-neglected neighborhoods. Construction costs and the risks of real estate development continue to rise and financing remains challenging.  Now is not the time to raise taxes on U.S. real estate,” DeBoer said. (Press Release, April 8)

With the House having approved a $5.3 trillion budget resolution, tax legislation is now on the horizon. This timely study provides critical data on the potential consequences of changing carried interest tax treatment.

Real Estate Industry Urges Congress to Preserve Carried Interest

Posted on by Trey Jackson

As tax negotiations continue this week on Capitol Hill, a coalition of 17 national real estate organizations submitted a unified message to congressional leadership urging preservation of current law on carried interest. (Letter)

Why It Matters

  • The coalition letter, led by the National Multifamily Housing Council and joined by The Real Estate Roundtable (RER) and others, highlighted that taxing all carried interest as ordinary income would raise taxes on 2.2 million real estate partnerships and nearly 9.7 million partners, potentially stalling new housing, infrastructure, and redevelopment projects.
  • Since carried interest and its tax treatment first emerged as a controversial political issue in 2007, RER has consistently opposed legislative proposals to tax all carried interest at ordinary income rates. (Axios, March 24 | NYT, March 8)
  • Research cited in the letter demonstrates that carried interest legislation would lower wages, reduce property values, and undermine economic growth. (Letter)

What’s At Stake

  • “Taxing carried interest at ordinary income rates would discourage the risk taking that drives job creation and economic growth. It would reduce economic mobility by increasing the tax burden on cash-poor entrepreneurs who want to retain an ownership interest in their business. It would have profound unintended consequences for housing affordability and main streets all across our country,” said Jeffrey DeBoer, President and CEO of The Real Estate Roundtable. Roundtable Weekly, Feb. 21)
  • The coalition emphasized that changing the tax treatment would particularly impact small and mid-sized real estate entrepreneurs who contribute sweat equity rather than large capital contributions to their projects.
  • The letter notes that the tax code ”has never, and should never, limit the reward for risk-taking to taxpayers who have cash to invest.”
  • Retroactive application of new tax policies on longstanding partnership agreements could harm small businesses, stifle entrepreneurs and sweat equity, and threaten future improvements and infrastructure in neglected areas.
  • Under the headline “Carried Interest Fight Gets Real,” media outlet Politico wrote that the real estate industry was “laying down a marker as lawmakers begin working to pass a deficit-conscious extension of the 2017 tax cuts.” (Politico, March 27)
  • The signatories of the letter included: National Multifamily Housing Council; American Hotel and Lodging Association; American Resort Development Association; American Seniors Housing Association; CCIM Institute; Council for Affordable and Rural Housing; ICSC Institute of Real Estate Management; Latino Hotel Association; Manufactured Housing Institute; Mortgage Bankers Association; NAIOP, the Commercial Real Estate Development Association; National Apartment Association; National Association of Black Hotel Owners, Operators, and Developers; National Association of Home Builders; NATIONAL ASSOCIATION OF REALTORS®

RER urges lawmakers to retain current law and avoid policies that would disincentivize investment, threaten housing affordability, and penalize job-creating entrepreneurs.

Real Estate Challenges: Business SALT, Carried Interest Emerge as Focal Points of Tax and Budget Discussions

Posted on by Trey Jackson

As congressional Republicans weigh their budget options and consider competing plans from both the House and Senate, their search for revenue offsets has included proposals to restrict the deduction for state and local taxes (SALT) on businesses and raise the tax rate on carried interest. 

Business SALT

  • Prior to the markup of its budget resolution, the House Budget Committee floated a menu of potential revenue offsets for reconciliation legislation, including a proposal to “eliminate the business SALT deduction.” (New York Times, Jan. 28)

  • Depending on how broadly the business SALT limitation is designed, it could include repealing the deductibility of state and local property taxes paid by commercial real estate owners.  Hill discussions on business SALT have intensified in recent weeks.  (Bloomberg, Feb. 18)
     
  • “Eliminating the business deduction for property taxes would be the equivalent of raising business owners’ property tax bills by roughly 40 percent.  Employers would owe federal tax on money that they do not have.  It would lead to insolvencies and foreclosures. It would cause self-inflicted injury to the U.S. economy, including unnecessary job losses, higher rents for families and individuals, and other inflationary pressures.  It is a recipe for a recession,” said Jeffrey DeBoer, President and CEO of The Real Estate Roundtable.

  • The idea of limiting business SALT has support from several outside organizations and, according to Politico, was initially floated by members of the House Freedom Caucus.  (Politico, Jan. 15)

  • “Business taxes are fundamentally different from state and local individual income taxes.  State and local business taxes are an unavoidable expense, an inescapable cost of doing business,” noted DeBoer. “Property taxes alone are, on average, 40% of operating costs for real estate businesses.  In many cases, capping the deductibility of property taxes would require businesses to pay income tax when their actual income and cash flow is negative.”

  • The Roundtable is working, alongside its real estate trade association partners, to raise awareness among policymakers of the risk and harm that a cap on business SALT poses for the industry and the broader economy.  

Carried Interest

  • President Trump’s recent call on Congress to close the “carried interest tax deduction loophole” has put a national spotlight back on the issue of carried interest and its proper tax treatment.  (Financial Times, Feb. 6)  

  • Trump’s expression of support for raising taxes on carried interest led Senators Tammy Baldwin (D-WI), Elizabeth Warren (D-MA), Bernie Sanders (I-VT) and others to reintroduce legislation, the Carried Interest Fairness Act. The bill would recharacterize all carried interest as ordinary income. (Politico, Feb. 18)

  • Sen. Baldwin filed a nonbinding amendment on carried interest during the Senate budget resolution debate this week but did not offer it for a formal vote.  

  • Carried interest emerged as a political issue in 2007, but remains largely misunderstood to this day. In real estate, carried interest is not compensation for services. General partners receive fees, taxed at ordinary rates, for routine services like leasing and property management. Carried interest is granted for the value the general partner adds, such as business acumen, experience, and relationships. It is also recognition for the risks the general partner takes.   

  • In response to the new legislation, the Americans for Tax Reform—alongside a broad coalition of other taxpayer advocacy groups—penned a comment letter urging lawmakers to consider the negative ramifications of this policy.

  • In the letter, the organizations argue that the proposal would discourage investment and reduce growth, urging Congress to oppose the bill. “The current tax treatment of carried interest is an intentional, pro-growth feature of the tax code for more than 100 years that incentivizes risk-taking and entrepreneurship, benefiting investors, public pension funds and retirees.” (Americans for Tax Reform, Feb. 19)

  • The Tax Cuts and Jobs Act of 2017 extended the holding period required for carried interest income to qualify for long-term capital gains treatment from one year to three years.

  • The false narrative surrounding the carried interest issue is that it targets only a handful of hedge fund billionaires and Wall Street executives. The carried interest legislation is far broader and would apply to real estate partnerships of all sizes.

  • “Taxing carried interest at ordinary income rates would discourage the risk taking that drives job creation and economic growth. It would reduce economic mobility by increasing the tax burden on cash-poor entrepreneurs who want to retain an ownership interest in their business. It would have profound unintended consequences for housing affordability and main streets all across our country,” said DeBoer.

Looking Ahead

As tax negotiations develop, RER will continue to engage with congressional leaders on both sides of the aisle to inform policymakers about the real-world consequences of proposed changes to the deductibility of business SALT and tax treatment of carried interest.  

While the budget debate will move forward, it will likely be several weeks, if not months, before the tax-writing committees mark-up and vote on the actual details of their tax and revenue legislation.

Senate Democrats Reintroduce Legislation to Tax Carried Interest at Ordinary Income Rates

Posted on by Trey Jackson

A group of Senate Democrats introduced legislation this week that would tax carried interest capital gains income at ordinary income tax rates of up to 40.8%. (Bloomberg Tax April 16)

Carried Interest Proposals

  • The Carried Interest Fairness Act was introduced on April 15 by Senate Banking Committee Chairman Sherrod Brown (D-OH) along with Sens. Tammy Baldwin (D-WI), Joe Manchin (WV), and several other Democratic co-sponsors.
  • According to Sen. Brown, the change would raise $6.5 billion in revenue over 10 years. The Senators introduced a similar bill in 2021. (Sen. Brown news release; Crain Currency, April 16)
  • This week’s carried interest bill is part of a broader effort by congressional Democrats to position legislative changes in anticipation of the expiration of 2017 Tax Cuts and Jobs Act provisions at the end of 2025. The approaching expiration of those individual provisionsis likely to drive tax negotiations next year into what some policymakers have referred to as the “Super Bowl of Tax.” (Bloomberg Tax, Jan. 4 and Axios, Feb. 16)

Democratic Proposals

FY2025 proposed Biden administration budget
  • President Biden’s 2025 budget also proposes taxing all carried interest as ordinary income. Most of the Biden tax agenda is carried over from his prior budgets. (Roundtable Weekly, March 15 and March 8 | White House Fact Sheet, March 11)
  • Senate Finance Chair Ron Wyden (D-OR) introduced legislation last year to treat the grant of carried interest as deemed compensation in the form of an interest-free loan from the limited partners to the general partner (GP). (Bloomberg Tax, Nov. 15, 2023)
  • The Roundtable has consistently opposed these and similar proposals since 2007 for failing to recognize that carried interest is actually granted for the value a General Partner adds beyond routine services, such as business acumen, experience, and relationships.  Carried interest also reflects a recognition of the risks the GP takes with respect to the partnership’s liabilities—e.g., funding predevelopment costs, guaranteeing construction budgets, and potential litigation.
  • Carried interest changes would also harm small businesses, stifle entrepreneurs and sweat equity, and threaten future improvements and infrastructure in neglected areas. They would increase the cost of building or improving infrastructure, workforce housing, and other socially desirable projects.

The Tax Cuts and Jobs Act of 2017 created a three-year holding period requirement for carried interest to qualify for the reduced 20% long-term capital gains rate.

#  #  #

Proposed Carried Interest Provisions, Opposed by Real Estate Industry, Cut From Reconciliation Bill

Posted on by Trey Jackson

Senator Kyrsten Sinema (D-AZ) at RER's 2022 Spring MeetingProposed changes to the taxation of carried interest were cut from Senate Democrats’ broad Inflation Reduction Act (IRA) yesterday at the request of centrist Sen. Kyrsten Sinema (D-AZ). The Roundtable and 14 other national real estate organizations wrote to all members of Congress on Aug. 3 in strong opposition to the measure. (Coalition letter, Aug. 3 | Wall Street Journal, Aug. 4 |Tax Notes, Aug. 5). Photo above: Sen. Sinema at The Roundtable’s 2022 Spring Meeting.

Vote on Revised Reconciliation Bill 

  • Sinema announced her decision in a statement released Thursday night, commenting she would “move forward” with the $790 billion reconciliation bill after removal of the carried interest provision—subject to the Senate Parliamentarian’s review of the revised bill.
  • Yesterday, Senate Majority Leader Chuck Schumer (D-NY) announced that the chamber will begin consideration of the bill on Aug. 6, setting up a weekend process of around-the-clock votes on hundreds of amendments to the bill.
  • Real Estate Roundtable President and CEO Jeffrey DeBoer commented today, “The wide-ranging climate measures in the revised bill include the most extensive clean energy investments ever considered by Congress—a positive step welcomed by the real estate industry. We are also pleased to see that carried interest provisions in the original version of the Inflation Reduction Act are out, since they would have clearly harmed the residential and commercial real estate industries, job creation and the economy.” 

Real Estate’s Carried Interest Opposition 

Construction mixed use real estate

  • The real estate coalition urged policymakers to preserve current carried interest law and detailed major concerns with the proposed changes to carried interest that were in the original IRA, brokered last week between Sens. Schumer and Joe Manchin (D-WV). (Coalition letter, Aug. 3 and Roundtable Weekly, July 29)
  • The Aug. 3 coalition letter noted, “The carried interest proposal would slow housing production, discourage the capital needed to reimagine buildings to meet post-pandemic business needs, hamper job creation and create an additional unknown in an already confusing economic environment.”
  • The real estate coalition letter concluded, “Now is not the time to impose a tax increase on the countless Americans who use partnerships to develop, own, and operate housing and other commercial real estate. We urge you to preserve current tax law as it relates to carried interest.” 

Senate Considers Changes 

Capitol 3 flags flying

  • Senate Democrats are making additional changes to the package, including adjusting the minimum tax on corporations and adding a 1% excise tax on stock buybacks. (New York Times, Aug. 4 and Punchbowl News, Aug. 5)
  • Before a final Senate vote can be held, the Senate Parliamentarian must ensure the bill complies with special budget reconciliation rules, which require provisions directly relate to spending and revenue—not policy.
  • One hurdle before the Parliamentarian is a clean energy tax credit that proposes a bonus incentive to developers who pay prevailing wages on certain projects. If it is determined to be a policy change, it will be dropped from the bill. (POLITICO Power Switch, Aug. 3)
  • A number of the IRA’s proposed revisions to the federal tax code could leverage greater private sector investments in clean energy building technologies, including:
    • A deduction to help make commercial and multifamily buildings more energy efficient (Section 179D),

    • A credit to encourage investments in renewable energy generation and other low carbon equipment such as solar panels, energy storage, and combined heat and power systems (Section 48), and

    • A credit to incentivize installations of EV charging stations (Section 30C). 

The Roundtable continues to work with its policy advisory committees and national real estate organization partners to assess how details in the bill language could impact CRE. These policies will be a focus of discussion during The Roundtable’s Sept. 20-21 Fall Meeting in Washington, DC. 

#  #  #

Sens. Schumer and Manchin Agree on Reconciliation Bill With Carried Interest and Energy Efficiency Provisions

Posted on by Trey Jackson

Sens. Joe Manchin and Chuck Schumer

An unexpected agreement announced Wednesday night between Senate Majority Leader Chuck Schumer (D-NY), above right, and Sen. Joe Manchin (D-WV), left, on a $790 billion reconciliation proposal includes $14 billion in increased taxes on carried interest and a 15% corporate minimum tax—in addition to $369 billion in climate spending that affects “clean energy” measures important to commercial real estate.

Senate Democrats are hoping to pass some version of the Schumer-Manchin language on a party-line vote before the upper chamber begins its summer recess on Aug. 8. (Senate Democrats’ joint statement and one-page bill summary, July 27 | Committee for a Responsible Federal Budget, July 28)

Legislative Details

Reconciliation Bill - Roundtable Town Hall

  • Today, The Real Estate Roundtable held an all-member virtual town hall to discuss major provisions within the 725-page Inflation Reduction Act (IRA) of 2022. The Roundtable is working with its policy advisory committees and national real estate organization partners to assess how details in the bill language could impact CRE.
     
  • Real Estate Roundtable President Jeffrey DeBoer stated, “The Roundtable is engaged with policymakers and Capitol Hill staff on the potential impact of the proposed bill on real estate capital formation, economic growth, clean energy investments, and affordable housing development. The industry is working together to mitigate any negative consequences for CRE before policymakers hold an eventual vote on a final bill.”

Taxes & Clean Energy

Capitol side bright

  • The IRA’s largest tax increase is a new 15% corporate minimum tax on businesses with profits over $1B whose reported book income exceeds reported taxable income. The measure is estimated to raise $313B. The package also includes protections that would preserve the value of the low-income housing tax credit for investors (typically large banks) that use the credit to reduce their effective tax rate.
  • The smallest tax increase would raise $14B in revenue by extending the capital gains holding period requirement for carried interest from 3 years to 5 years, although there is an exemption for real estate. Additionally, there are technical reforms to the holding period rules for measuring the 3- or 5-year holding period. (Deloitte Tax News & Views, July 29)
  • The carried interest holding period change includes a real estate exception for gain associated with assets used in a real property trade or business. The language in the IRA on carried interest is identical to text in the House Ways and Means Committee’s previous reconciliation bill last year—language that was dropped from the version that passed the full House. (Roundtable Weekly, Sept. 17, 2021)
  • The Schumer-Manchin agreement also proposes significant reforms to Section 179D—the tax code’s main provision to incentivize energy efficient commercial buildings. The 179D reforms are geared to encourage more existing building “retrofits” although maximum incentives amounts depend on compliance with heightened wage and labor standards.
  • Tax incentives are also included to encourage investments in solar panels, energy storage, and EV charging stations. (See Summary of the bill’s Energy Security and Climate Change Investments)

Timeline

DC night iconic buildings moon

  • There are several challenges to the Senate Democrats’ timeline for passage of the bill in early August. 
  • Senate Democrats need all 50 members of their caucus present for an eventual budget reconciliation vote, along with Vice President Kamala Harris to break an anticipated tie with 50 Republicans. Yet Covid-19 infections have caused recent absences. (The Hill, July 28) 
  • The bill was sent to Senate Parliamentarian Elizabeth MacDonough to see if it conforms with reconciliation budget rules, a process that will spill over into next week. (BGov, July 29)
  • Arizona Democratic Senator Kyrsten Sinema is a key centrist vote, considering she has long opposed changes to the taxation of carried interest. Sinema’s spokesperson Hannah Hurley said yesterday that the Senator is “reviewing the text and will need to review what comes out of the parliamentarian process.” (BGov, July 29) 

#  #  # 

Roundtable CEO Questions Wisdom of Administration’s Proposed Carried Interest Tax Increase

Posted on by Trey Jackson

Jeffrey DeBoer, Real Estate Roundtable President and CEO

This week, Real Estate Roundtable President and CEO Jeffrey DeBoer, above, challenged the Administration’s recently proposed budget, which would recharacterize nearly all real estate carried interest as ordinary income, in Bisnow, a prominent commercial real estate media outlet. (Bisnow, April 13) 

Taxing Carried Interest as Ordinary Income 

  • President Biden’s budget includes tax proposals recycled from last year that failed to pass congressional  negotiations, including taxing long-term capital gains at ordinary income rates – and taxing carried interest in real estate partnerships as ordinary income. (Roundtable Weekly, April 1) 
  • In Bisnow’s “Taxing Carried Interest as Ordinary Income: The Idea that Never Dies, but Never Becomes Law Either,” DeBoer noted, “The president’s carried interest budget proposal would, for the first time, limit capital gain tax treatment to the return on cash and cash-equivalent investment. This would ignore the reality that real estate owners and developers bear significant financial risks beyond their capital contribution.”
  • DeBoer added, “The capital gains tax incentive has always recognized and rewarded other factors beyond just invested cash, including the assumption of construction, litigation and market risk, as well as the sweat equity associated with owning investment real estate.“
  • Targeting tax evaders and illegal transactions is appropriate, DeBoer noted, but he emphasized that penalizing entrepreneurship and discouraging noncash risk-taking by recharacterizing all carried interest as ordinary income would be a mistake.
  • Proposals to recharacterize carried interest as ordinary income have been introduced in Congress perennially since 2007. The Tax Cuts and Jobs Act of 2017 included a provision extending the holding period requirement from one to three years for carried interest to qualify for the reduced long-term capital gains tax rate. 

Carried interest and other tax issues outlined in The Roundtable’s recently released 2022 Policy Agenda will be discussed during the April 25-26 Spring Meeting (Roundtable-level members only) in Washington DC.  

#  #  # 

Real Estate Coalition Urges Lawmakers to Preserve Longstanding Carried Interest Tax Rules

Posted on by Trey Jackson

The need for policymakers to preserve longstanding tax law governing partnerships and profits interests – carried interest – was the focus of a June 16 letter sent by The Real Estate Roundtable and 14 other national real estate organizations to congressional tax writers. 

Pending Proposals

  • The Biden administration’s budget includes a proposal to tax carried interest as ordinary income.  The Biden proposal, as well as pending House legislation (the Carried Interest Fairness Act, H.R. 1068), would result in an enormous tax increase on Americans who use partnerships to develop, own, and operate real estate. (Roundtable Weekly, Feb. 27 and April 30)
  • The real estate coalition’s letter emphasized that the proposed changes to taxation of carried interest would:
    • Increase the cost to construct or improve real estate and infrastructure, including workforce housing, senior living communities, industrial properties or investments that support economic inclusion or bring environmental benefits; 
    • Create unintended consequences for local communities. Property taxes on real estate contribute 75 percent of local tax revenue and provide a stable and reliable source of funding for critical public services like education and law enforcement; 
    • Create new tax barriers during the post-COVID era as buildings throughout the country need to be repurposed and converted.

Reality vs. Perception

  • The industry letter to policymakers also countered the false narrative that the carried interest issue targets only a handful of hedge fund billionaires and Wall Street executives. The letter notes the following realities:
    • The IRS reports that real estate partnerships represent half of the four million partnerships in the United States. These two million partnerships and their 8.6 million partners who own and operate multifamily rental housing, office buildings, shopping centers, hotels, distribution centers, senior living communities, and other commercial real estate in every town, city, and region of the country would face damaging impacts.
    • Carried interest involves recognition of the risks a general partner takes, including the funding of predevelopment costs; guaranteeing construction budgets and financing; and exposure to potential litigation.

Retroactive Change

  • The letter also notes that current proposals would limit capital gain treatment only to taxpayers who have cash to invest. Those who invest entrepreneurial innovation, risk taking, and sweat equity would no longer receive capital gain treatment.
  • The proposals would also apply retroactively to partnership agreements executed years, often decades, earlier.  Changing the tax treatment of proposals agreed to years earlier would undermine the predictability of the tax system and discourage long-term investment that encourages economic growth, according to the letter.

The Roundtable’s Tax Policy Advisory Committee (TPAC) met June 16 during The Roundtable’s Annual Meeting to discuss the carried interest proposals and the current tax legislative landscape in Washington. 

#  #  # 

Legislation Reintroduced in the House to Change Taxation of Carried Interest

Posted on by Trey Jackson

A group of House Democrats led by Bill Pascrell Jr. (D-NJ), chairman of the House Ways and Means Oversight Subcommittee, introduced the Carried Interest Fairness Act of 2021 (H.R. 1068) on Feb. 16. For taxpayers with a profits interest in a partnership that invests in capital assets, such as stock and real estate, the bill would convert long-term capital gain to ordinary income. (Pensions & Investments and Bisnow, Feb. 16)

  • As currently drafted, the House legislation would apply to dispositions of partnership interests, distributions of partnership property, and sales of partnership assets that occur in tax years ending after the date of enactment. Thus, if the bill became law this summer or fall, and a partnership’s tax year corresponded with the calendar year, the tax increase would apply to gains realized after December 31, 2020. There is no provision that would exempt or grandfather prior partnership agreements, even though the agreements were negotiated based on well-settled tax law as it existed at the time.
  • The top individual income tax rate today is 37%. The current maximum tax rate on long-term capital gain is 20%.  In some cases, an additional 3.8% tax on net investment income also applies. 
  • The six co-sponsors of H.R. 1068 are Reps. Reps. Don Beyer (D-VA), Earl Blumenauer (D-OR), Judy Chu (D-CA), Andy Levin (D-MI), Katie Porter (D-CA) and Tom Suozzi (D-NY). (Rep. Pascrell news release, Feb. 16).  Similar legislation has been introduced in every Congress since 2010.
  • In the Senate, incoming Finance Committee Chairman Ron Wyden (D-OR) outlined his tax agenda during a Jan. 13 call with reporters, including plans to move forward with an increase in the corporate tax rate and major changes in the taxation of individual capital gains. Wyden added he would also pursue raising the current 21% corporate tax rate and change the tax treatment of carried interest (Roundtable Weekly, Jan. 15).
  • During the Presidential campaign, then-candidate Joe Biden did not put forward a carried interest proposal, but rather proposed raising the maximum tax rate on long-term capital gains to create rate parity with wages, rental income, and other sources of ordinary income. 

The Roundtable & Carried Interest

  • The Roundtable has consistently opposed proposals to tax all carried interest at ordinary income rates. Congress likewise has consistently rejected proposals to recharacterize all profits interests as ordinary income. Carried interest is not compensation for services.  General partners receive fees for routine services like leasing and property management.  Those fees are taxed at ordinary tax rates.  The carried interest is granted for the value the general partner adds to the venture beyond routine services, such as business acumen, experience, and relationships.  It is also recognition of the risks the general partner takes with respect to the general partnership’s liabilities, such as predevelopment costs and potential litigation. 
  • “Taxing carried interest at ordinary income rates would discourage the risk taking and sweat equity that drives job creation and economic growth,” said Roundtable President and CEO Jeffrey DeBoer. “It would encourage real estate owners to borrow more money to avoid taking on equity partners, and it would make it more expensive to build or improve real estate and infrastructure, including workforce housing, assisted living communities, and industrial properties, to name just a few. Some development simply won’t happen, especially in long-neglected neighborhoods or on land with potential environmental contamination,” DeBoer added.
  • The Tax Cut and Jobs Act of 2017 created a 3-year holding period requirement for carried interest to qualify for the long-term capital gains rate.

As Congress considers additional economic recovery legislation, The Roundtable and its Tax Policy Advisory Committee (TPAC) will continue working with policymakers, including the Congressional tax-writing committees, to preserve and improve tax rules that promote capital formation and the appropriate treatment of entrepreneurial activity and productive risk-taking.   

#  #  #