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Government Relations & Public Policy

Schumer-Manchin Deal Dings Carried Interest

July 29, 2022

Senate Majority Leader Chuck Schumer (D-NY) and Sen. Joe Manchin (D-WV) announced on July 27, 2022, that they had reached a $740 billion agreement that would significantly lower carbon emissions, curb healthcare costs, reduce the deficit and provide a significant investment in domestic manufacturing and energy production. The agreement, known as the Inflation Reduction Act of 2022, caught many lawmakers by surprise, especially after Sen. Manchin had appeared to kill a broader bill with tax changes just weeks before. 

The legislation includes language opposed by ICSC that would limit the capital gains treatment of the promote, or “carried interest.” It also provides $45 billion of additional funds for IRS enforcement and would require corporations with over $1 billion of profits to pay a 15% minimum tax on their adjusted financial statement income.

It is still unclear if Sen. Kyrsten Sinema (D-AZ) will support the agreement. A critical swing vote, she has steadfastly opposed changes to carried interest.  ICSC is asking her and other congressional allies to remove the carried interest changes. Doing so would not impact the ability for it to proceed through the Senate’s expedited reconciliation process. 

Please Click Here to Send a Message to Your Senators. 

The carried interest provision would extend the holding period for a carried interest to 5 years but includes an exception for real estate, leaving it with a 3-year holding requirement. While the 2017 Tax Cuts and Jobs Act had ostensibly increased the holding period to 3 years already, this extension did not previously apply to direct sales of rented real estate (so called “section 1231 property”). The Senate agreement would expand the 3-year holding period to Section 1231 gains, thus greatly expanding the scope of the 3-year rule within the real estate industry. Further, the proposal delays the point at which the 3-year clock starts until all of a fund’s assets are acquired or until partners acquire substantially all of their interest in the partnership. Finally, it overrides general partnership tax law with respect to many transfers of partnership interest that currently are not a taxable event, e.g., a contribution of a carried interest to a successor partnership or a gift of a carried interest.  

While carried interest is often portrayed in the press as only affecting private equity and hedge fund managers, it would have a far greater impact on real estate, which frequently relies on equity capital from outside investors. The pre-development process in real estate can take several years and cost millions, depending on the number of complicating characteristics, including a project’s size and its location. Developers are also at risk on recourse debt, potential lawsuits, unforeseen environmental remediation and tenancy guarantees. According to ICSC polling, 70% of owner-developers have used a carried interest in their deals.  

For more information contact Phillips Hinch at phinch@icsc.com.