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Members of the U.S. House of Representatives have once again introduced legislation to end the capital gains treatment of carried interest (H.R. 1068). Under this legislation (the so-called Carried Interest Fairness Act), a carried interest – or “the promote” in real estate terms – would be treated as wages taxed at ordinary income rates and also be subject to employment taxes.
The bill’s sponsor, Representative Bill Pascrell (D-NJ), was joined by five original cosponsors: Representatives Andy Levin (D-MI), Katie Porter (D-CA), Donald Beyer (D-VA), Tom Suozzi (D-NY) and Earl Blumenauer (D-OR).
The proponents of the bill are focused on the private equity industry. Unfortunately, real estate is at risk of becoming collateral damage, especially smaller and family-owned real estate businesses that use the partnership structure. All indications are that H.R. 1068 will be under serious consideration to pay for other priorities.
ICSC opposes this legislation as it would increase taxes on real estate partnerships, discouraging investment in development projects that create new jobs, grow the local tax base and make communities better. This tax increase would be particularly harmful to our industry as our members continue to recover from the impact of COVID-19.
A carried interest or promote is the sponsor’s contractually agreed upon share of the proceeds from a project that are received after the investors have been paid a predetermined rate of return. It is not guaranteed and is justified based on the real risks associated with creating a successful shopping center, including recourse on debt, unforeseen environmental remediation, permitting delays and tenancy guarantees.
Under decades of established tax law, the nature of the carried interest – short or long-term capital gain or ordinary income – has been determined at the entity level and applied equally to all partners. The Carried Interest Fairness Act would overturn that precedent. Only the outside investors would be entitled to capital gain treatment.
For more information about this issue contact Phillips Hinch, ICSC Vice President of Tax Policy, at 202-626-1402 or phinch@icsc.com.