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Global Public Policy

Wyden introduces new proposal to raise taxes on carried interest

May 29, 2019

Sen. Ron Wyden (D-OR), the ranking Democrat on the Senate Finance Committee, introduced legislation on May 23 to raise taxes on carried interest – or “the promote” as it is often called by real estate professionals. 

The bill’s introduction follows comments by President Donald Trump that he would like to take a second look at how carried interest is taxed.

Sen. Wyden takes a different approach than earlier bills sponsored by Sen. Baldwin (D-WI) and Rep. Pascrell (D-NJ) – S. 781 and H.R. 1735.

Under Wyden’s bill – S. 1639 – a general partner’s right to carried interest would be treated as an implicit loan from the partnership’s investors. This would create “deemed compensation” for the general partner that would be taxed at ordinary income rates and subject to self-employment taxes. The deemed compensation would be calculated annually, starting when the partnership is formed, effectively taxing carried interest years before it would ever be realized.  

In addition, the bill would treat the deemed compensation as creating a long-term capital loss for the general partner. This capital loss would offset capital gains realized upon the ultimate sale of the property. If a project failed to produce a capital gain, however, the general partner would be likely unable to recover his or her taxes because capital losses cannot be used to offset ordinary income.

ICSC opposes this legislation and similar bills to increase taxes on carried introduced by Sen. Baldwin (D-WI) and Rep. Pascrell (D-NJ).

Additional information:

Phillips Hinch

Vice President, Tax Policy