Outside of one brief period, the United States has traditionally taxed long-term capital gains at a lower rate than ordinary income (wages, rent, and other compensation). Today, long-term capital gains are taxed at a top rate of 20%, but the rate rises to 23.8% if the income is subject to the 3.8% tax on net investment income. Currently, the net investment income tax applies to real estate gains earned by passive investors and not the income earned from the active conduct of professionals in real estate.

Like-kind exchange rules allow taxpayers to defer tax when they exchange one property held for investment or business use for another property of a “like kind.” Since 1921, the tax code has allowed taxpayers to defer capital gains on these exchanges. Today, LKEs are central to real estate markets and play a critical role in financing the improvement and modernization of U.S. real estate.

Real estate generally is owned through “pass-through” entities that allow income to pass through to individual owners rather than taxing the income at the entity level. Partnerships promote and attract investment by allowing owners to allocate economic returns based on investors’ appetite for risk. Our pass-through tax and regulatory rules create greater flexibility in the ownership and operation of businesses, support risk-taking, and contribute to the economic dynamism that differentiates the United States from other countries. 

A “carried” interest is the interest in partnership profits a general partner receives from the investing partners for successfully managing the investment and bearing the entrepreneurial risk of the venture. Carried interest may be taxed as ordinary income or capital gain, depending on the type of revenue the partnership generates. Legislation proposing to change the tax treatment of carried interest has been introduced in various forms since 2007.

When an individual dies, the U.S. levies a comprehensive tax on his or her wealth and assets, including unrealized gains, through the estate tax. When wealth exceeds an exemption amount it is generally taxed at a rate of 40%. Separately, for income tax purposes, the basis of assets in the hands of an heir is “stepped up” to fair market value at the time of the decedent’s death.

An Opportunity Zone is a low-income, economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. The tax benefits can include the deferral of tax on invested capital and the exclusion of capital gains tax on fund investments held for ten years or more.

President Biden and certain key lawmakers, including Senate Finance Committee Chairman Ron Wyden (D-OR), have proposed taxing gains on an annual basis, regardless of whether the asset has been sold.