A proposed change in the tax treatment of “carried interest” from a capital gain to ordinary income that would result in a tax increase for some companies should be scrapped, according to the Building Owners and Managers Association (BOMA) International and the Real Estate Round Table.
House Ways and Means Committee Chairman Charles Rangel’s (D-NY) proposal, part of the Alternative Minimum Tax bill, would increase the tax on carried interest from 15 percent to 35 percent.
Carried interest is the portion of the profits a general partner receives in a partnership. Requiring all returns from carried interests be taxed at ordinary income rates, no matter the nature of the investment or the investment period, will disrupt the investment relationship between entrepreneurs and their capital finance partners, BOMA says.
Rangel has indicated that the plan is meant to close a tax loophole on "hedge fund" managers. Under the bill, hedge fund managers would no longer receive the lower capital gains rate of 15 percent for what is essentially a management fee, which generally are taxed as ordinary income, Rangel says.
But increasing the tax rate on carried interest would negatively impact commercial real estate investment, affecting those who use business tax incentives to fuel property development, says Brenna Walraven, BOMA International chairman and chief elected officer.
“The significance of this change will be felt most noticeably on ‘Main Street’ and in underserved cities and neighborhoods that require developers to take up front risks in exchange for future profits in tough economic areas,” Walraven says.
A change in the tax code requiring carried interest be taxed as ordinary income would also more negatively impact the small real estate entrepreneurs who may not have the same negotiating leverage larger firms do to pass on a carried interest tax increase to their investors or employ new investment structures to avoid the tax all together, BOMA says.
More economic analysis of the proposal is needed to ensure it does not unintentionally harm economic grown, says Jeffrey DeBoer, president and CEO of The Real Estate Roundtable.
“There is no question that the carried interest proposal — which represents a 133 percent tax increase — threatens many desirable, job-creating real estate transactions all across the country,” DeBoer says. “The proposal has the potential to further weaken an economy already shaken by financial market turmoil.”
Rangel has said the bill is revenue neutral.
