The need for policymakers to preserve longstanding tax law governing partnerships and profits interests – carried interest – was the focus of a June 16 letter sent by The Real Estate Roundtable and 14 other national real estate organizations to congressional tax writers. 

Pending Proposals

• The Biden administration’s budget includes a proposal to tax carried interest as ordinary income.  The Biden proposal, as well as pending House legislation (the Carried Interest Fairness Act, H.R. 1068), would result in an enormous tax increase on Americans who use partnerships to develop, own, and operate real estate. (Roundtable Weekly, Feb. 27 and April 30)
• The real estate coalition’s letter emphasized that the proposed changes to taxation of carried interest would:
  • Increase the cost to construct or improve real estate and infrastructure, including workforce housing, senior living communities, industrial properties or investments that support economic inclusion or bring environmental benefits; 
  • Create unintended consequences for local communities. Property taxes on real estate contribute 75 percent of local tax revenue and provide a stable and reliable source of funding for critical public services like education and law enforcement; 
    
  • Create new tax barriers during the post-COVID era as buildings throughout the country need to be repurposed and converted.

Reality vs. Perception

• The industry letter to policymakers also countered the false narrative that the carried interest issue targets only a handful of hedge fund billionaires and Wall Street executives. The letter notes the following realities:
  • The IRS reports that real estate partnerships represent half of the four million partnerships in the United States. These two million partnerships and their 8.6 million partners who own and operate multifamily rental housing, office buildings, shopping centers, hotels, distribution centers, senior living communities, and other commercial real estate in every town, city, and region of the country would face damaging impacts.
  • Carried interest involves recognition of the risks a general partner takes, including the funding of predevelopment costs; guaranteeing construction budgets and financing; and exposure to potential litigation.

Retroactive Change

• The letter also notes that current proposals would limit capital gain treatment only to taxpayers who have cash to invest. Those who invest entrepreneurial innovation, risk taking, and sweat equity would no longer receive capital gain treatment.
• The proposals would also apply retroactively to partnership agreements executed years, often decades, earlier.  Changing the tax treatment of proposals agreed to years earlier would undermine the predictability of the tax system and discourage long-term investment that encourages economic growth, according to the letter.

The Roundtable’s Tax Policy Advisory Committee (TPAC) met June 16 during The Roundtable’s Annual Meeting to discuss the carried interest proposals and the current tax legislative landscape in Washington. 

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