POSSIBLE INCREASE IN THE CARRIED INTEREST TAX

First American Exchange Company
July 21, 2010 — 257 views  

Become a Bronze Member for monthly eNewsletter, articles, and white papers.

The U.S. House of Representatives recently voted to pass H.R. 4213, which, effective January 1, 2011, will increase the tax on carried interest.

 

What is "carried interest" and how does it affect the real estate industry? It is common for developers in the home building industry to use partnerships and other pass-through entities to organize home builders and subcontractors for their projects. In this role, the developer fills the role of general partner and outside investors act as limited partners, providing much of the initial equity financing. It is common for the developer share of the residual profit to be classified as “carried interest.”

 

Current law allows for carried interest to be paid at capital gain tax rates. Per the International Council of Shopping Centers,

“[H.R. 4213] will tax the “carried interest” proceeds of real estate partnerships and LLCs at 50% ordinary income and 50% long-term capital gains for two years, then move to a 75/25 split (75% ordinary)."

ICSC projects that with the passage of this bill, the tax on carried interest would increase by 108% over the first two years and then shift to a 156% tax increase once the 75/25 split is in place.

Although some observers believe this is a more equitable method of taxation, many commentators fear that this increased tax will lessen the incentives for entrepreneurs to develop new projects and reduce the flow of capital into real estate investments. For further discussion on this subject, please visit the following links:

http://www.taxpolicycenter.org/briefing-book/key-elements/business/carried-interest.cfm

http://www.cbpp.org/cms/?fa=view&id=562

http://www.naiop.org/governmentaffairs/issues/carriedinterest.cfm

http://www.nahb.org/fileUpload_details.aspx?contentTypeID=3&contentID=131457&subContentID=253509

First American Exchange Company

First American Exchange Company, LLC

First American Exchange Company provides qualified intermediary services under Section 1031 of the Internal Revenue Code, which allows investors to exchange "like-kind" investment properties without recognizing capital gains. First American Exchange facilitates tax-deferred delayed exchanges, reverse exchanges, personal property exchanges, and build-to-suit exchanges for residential and commercial transactions through exchange offices located across the nation.