Issues & Publications
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Capital Gains -- Carried Interests - Issue Summary
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| What is the fundamental issue? |
Many real estate partnerships are organized with general partners, who contribute their expertise (and, occasionally, some capital) and limited partners who contribute money and property (capital) to the enterprise. Generally the profits of the partnership are divided among the limited partners who contribute capital. A common practice among real estate partnerships, however, is to permit the general partner to receive some of the profits through a "carried interest," even when the general partner has contributed little or no capital to the enterprise. The general partner's profits interest is "carried" with the property until it is sold.
During the time that the real estate is held, the general partner receives compensation and fees in the form of ordinary income. The limited partners receive both ordinary income from operations and capital gains income from any profits generated during the year. When the property is sold, the limited partners receive their profits distributions (the earnings on the capital they have invested) as capital gains. The general partner also receives the value of its carried interest as capital gains income.
Congress has proposed treating the income from a general partner's carried interest as ordinary income. |
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| I'm a Realtor®. What does this mean to my business? |
| A residential real estate sales agent and/or broker will not be directly affected by the proposal, as it applies only to real estate partnerships that have carried interests. Real estate brokerage is rarely, if ever, organized in that model. Real estate investment, however, is typically held in partnership form. Not all partnerships include both general and limited partners or carried interests for the general partners, but real estate investments that are held in that form would be harmed by the proposal. By increasing the tax burden on these real estate partnerships, the proposal would make real estate a less attractive investment. When the value of real estate investment is impaired, there is an indirect impact on all real estate. Thus, all REALTORS have a stake in this proposal. |
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| NAR Policy: |
| NAR opposes any proposal that would eliminate capital gains treatment for any carried interest of a real estate partnership. Rationale: Utilization of the carried interest mechanism for real estate partnerships is a standard operating practice that has not, historically, been seen by either courts or policy makers as a "loophole." Rather, capital gains treatment for income from a carried interest is seen as a reward for entrepreneurs who take the risks inherent in new projects and in making capital investments. Capital gains treatment of carried interests also mitigate the impact of inflation on a long-term investment. |
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| Legislative/Regulatory Status/Outlook: |
In 2008, the carried interest proposal generated significant controversy immediately upon its introduction. It was contained in a major tax overhaul bill Chairman Rangel introduced, and was used as a "pay-for" in legislation that was never enacted.
The Obama Administration has proposed a similar approach to carried interests in its FY 2010 budget. The carried interest proposal is not, however, included in the House or Senate versions of the congressional budget resolution. Nonetheless, the tax-writing committees will be seeking new revenue sources throughout 2009. No tax legislation is anticipated until the late summer or early fall of 2009.
Chairman Rangel has indicated that when the Committee turns to tax restructuring (after the Obama economic stimulus and health care debates), the carried interest proposal will be part of the discussion. |
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