Just as commercial real estate is starting to recover… Congress plans to drive a stake through its heart and raise income taxes from 15% capital gains rate to 35% ordinary income rate. Tell your U.S. Senators about the unintended consequences associated with the carried interest proposal. Please call 202-224-3121 and ask to be connected to your Senators’ offices. Visit http://lac.icsc.org/icsc/dbq/officials/ to look up your Senators.
Key Points:
- The tax increase on carried interest proposed in the tax extenders package will have serious unintended consequences to local communities.
- This proposal would be the largest tax increase on real estate since the 1986 Tax Reform Act.
- This tax increase is likely to hurt economic redevelopment and job creation in our most economically deprived communities because it captures real estate development.
- While the original target was private equity and hedge fund managers, this proposal will disproportionately impact the real estate industry because it will increase the tax on the general partner’s share of profits in a real estate partnership.
- Unlike hedge fund and private equity firms, carried interest in real estate deals is not simply compensation for services. Rather, it is the return for taking on the tremendous risks and liabilities associated with real estate development projects, such as environmental concerns, lawsuits, operational shortfalls, construction delays and loan guaranties.
- This potential tax increase does not recognize the entrepreneurial risk and personal guarantees that the managing partner offers on behalf of the real estate partnership.
- Quite simply, if this legislation is enacted, the managing partner’s incentive to take-on the risk is greatly diminished. Projects with brownfield, mixed-use, or low income components will be most impacted by the carried interest proposal because they are the most risky.
- This tax increase will also hit small to medium size developers the hardest. These developers are already struggling with the current credit crisis, and this proposal will further limit available capital in the real estate market.
- With the commercial real estate industry under serious strain due to current economic conditions, raising this carried interest tax on real estate will not only threaten economic development projects, but it will also jeopardize the related jobs that those projects create.