Tax Extenders and Carried Interest to Senate Vote

CCIM Institute Call to Action
Tax Extenders and Carried Interest

On May 14, 2010 CCIM Institute initiated a Call to Action regarding the Tax Extenders Package that included the change in tax treatment of carried interest. Last Friday, May 30, the U.S. House of Representatives passed the tax package bill, renamed the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213). The bill narrowly passed by a vote of 215-204 and will now go to the U.S. Senate, where deliberation will begin as early as June 7.

Along with increasing the tax rate on carried interest to 39.5% from its current rate of 15%, the legislation includes provisions that would extend long-term unemployment benefits and renew various business tax breaks through 2011, such as a research and development credit. Regarding carried interest, new language was added that would subject 75% of general partners’ profits to the new, higher tax rate in 2013, while 50% of partners’ profits would be taxed the higher rates immediately upon its effective date. Additionally, the effective date of the carried interest provision was postponed to Jan. 1, 2011, instead of the original date of Jan. 1, 2010.

Despite the postponement of the effective date, it is extremely important to completely remove this carried interest tax increase language from the bill. The commercial real estate industry will be severely impacted by the proposed increase on carried interest income and your efforts are needed to ensure that this language is swiftly removed from the tax extenders package legislation. CCIM Institute legislative staff encourages all members to act quickly contacting their U.S. Senators and requesting they vote against this bill. It is imperative that our Senators understand the impact this legislation will have on the commercial real estate industry.
History of Carried Interest Income
Real estate partnerships are often organized as limited partnerships in which the limited partners provide capital and the general partner(s) provides operational expertise. When a partnership property is sold, the limited partners generally reap the profits in proportion to their capital investment. Often, however, the limited partners grant a profits interest to general partner(s). This profits interest is known as a "carried interest." A carried interest is designed to act as an incentive for a general partner to maintain and enhance the value of the real estate so that the operation of the property is a value-added proposition.

In order to extend the tax cuts, Congress is seeking new revenue sources to fund the extensions. Included in the current legislation is a provision to change the tax treatment on carried interest from capital gains to ordinary income. Currently, the capital gains rate is 15%. Changing the tax treatment to ordinary income would raise tax rates on carried interest to 39.5%.

Changing the tax treatment of carried interest would be detrimental to commercial real estate because taxing the general partner at an ordinary income rate would create a disincentive for real estate investment, further damaging an already fragile market.

We urge all members to immediately contact their Senators and tell them you oppose the change in tax treatment of carried interest included in The American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213). This matter is extremely time sensitive, so immediate contact with your U.S. Senator is imperative.

How to contact your Senators:
1. Look up your members of Congress and their contact information at the following website: www.congress.org.
2. Introduce yourself in a sentence or two. For instance: "I am a constituent and a commercial real estate professional who…"
3. Use the bullets (below) to argue your point. You are encouraged to add your own examples.
4. If you will be faxing your legislators, print your letter on your company letterhead.
5. After contacting your legislators, please contact the CCIM Institute legislative liaison at jnorwich@cciminstitute.com or 312-329-6033.

Call to Action Discussion Points
Carried Interest Discussion Points:
• Approximately $1 trillion of commercial and residential rental real estate is held privately in America today. The great majority of these properties are held by partnerships. Changing the tax rates on carried interest from capital gains rates to ordinary income rates would be devastating to these businesses.
• In 2007, real estate made up the largest category (48%) of partnerships, representing $4.4 trillion in investments.
• Real estate investments are designed as long-term investments. The capital is "patient" because property owners take major risks and hold the asset for long periods of time before seeing a gain, thus should be taxed at capital gains rates.
• Unlike hedge fund managers, capital gains treatment for general partners involved in real estate partnerships is an appropriate incentive for risk taking. The direct risks include environmental issues, loan guarantees, and lawsuits, to name a few.
• Drives investors to put their money elsewhere such as stocks with much more favorable tax treatment. Creates a disincentive to invest in real estate since many would no longer earn a reasonable profit.
• Stifles growth in a part of our economy that has become increasingly important over the last several years due to manufacturing, call centers, and other key industries moving offshore.
• Punishes partners involved with prior arranged transactions by causing a totally different economic result than all partners agreed with in advance. This has been characterized as a drastic change in tax rules and could be devastating to the industry.
• Fails to recognize that real estate investors are involved in their investments daily, while hedge fund managers are not involved daily in their investments.
• The real estate industry, in all its commercial, multifamily, and individual investment categories, is very fragile at present and is likely to remain so. These new tax burdens on real estate owners will impair and delay further recovery.

Carried interest rates from 15% to 39.5% - no thanks!
Please contact Keith Darby @ 305-720-7925 should you require his commercial real estate services.