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Tax Issues

Carried Interest

Since 2007, ICSC has worked closely with our members to successfully defeat numerous proposals by Congress to change the tax treatment of carried interest. Most recently, a limitation on carried interest was initially included in legislation proposed by Senators Charles Schumer (D-NY) and Joe Manchin (D-WV), the Inflation Reduction Act of 2022. Following intensive efforts by both our government relations team and our members, this provision was removed by the request of Senator Kyrsten Sinema (D-AZ). 

Carried interest—or “the promote” in real estate terms—is a common feature of many development deals. More than half of partnerships in the U.S. are real estate related. Roughly 70 percent of ICSC members say they have used carried interest in their deals. Limiting or repealing the capital gains treatment for carried interest would disincentive developers from undertaking projects at a time when the industry is repositioning properties to address the impact of COVID and ongoing consumer trends.

Additional Tax Increases of Concern

The Biden Administration’s FY2023 Budget includes a number of tax increases that would fall squarely on the marketplaces industry and discourage long-term real estate investment in local communities.

To date, none of the President’s proposals have been included in active legislation in Congress but do remain under active consideration. ICSC has been working actively to educate members of Congress about the consequences of limiting like-kind exchanges and repealing stepped-up basis of inherited assets that are used in an active business. 

Keeping Section 1031 of the tax code (Like-Kind Exchanges)

  • LKEs have been part of the tax code since 1921 and were retained for real estate transaction in the tax reform law.
  • LKEs supported 976,000 jobs, contributed $48.6 billion of labor income and $97.4 billion of value added to the U.S. GDP in 2021, according to research conducted by Ernst & Young.
  • Repealing or limiting section 1031 would reduce the exchange of properties, which generate local transfer and recording fees and trigger property reassessments that increase the local tax base.

ICSC is in favor of preserving Section 1031 (LKEs) to support the efficient deployment of capital and spur capital expenditure that create local jobs, protect property values, generate state and local tax revenue, lower rents and reduce risk in the economy through less leverage. In addition to supporting healthy commercial real estate markets, LKEs are important to farmers and ranchers as well as land conservation efforts. 

Preserving the stepped-up basis

  • The Biden Administration proposes to end stepped-up basis of inherited assets and tax unrealized capital gains at death. This would be in addition to the current estate tax of 40 percent above the exemption of $12.06 million per couple. Together with the President’s proposal to tax capital gains at ordinary rates, that would be a combined rate of over 60 percent.

  • Repealing stepped-up basis would be a new and large administrative burden on nearly every American family and small business. Many family-owned businesses would struggle to pay the tax from their ongoing operations and would be forced to liquidate.
  • EY study found that repeal of stepped-up basis would reduce wages by $32 for every $100 in new taxes collected and eliminate 80,000 jobs per year.

ICSC opposes removing the stepped-up basis.

Learn More About the Congressional Tax Writing Committee Members: 

House Ways and Means Committee 

Senate Finance Committee 

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