Latest News: Carried Interest

The following news summaries are compiled from NMHC's Update newsletter.  For more information on all of NMHC's legislative and regulatory issues, read the NMHC Update here.  


Recent Articles


FEBRUARY 2, 2012

Carried Interest Resurfaces on Capitol Hill and Campaign Trail 

With the release of Republican presidential hopeful Mitt Romney’s tax returns, many media outlets have glommed onto the Massachusetts governor’s effective tax rate of roughly 14%, suggesting that it may be artificially low thanks to the favorable treatment of carried interest under current tax code. At the same time, Rep. Chris Van Hollen (D-Md.), who is serving as a conferee for legislation to renew the payroll tax cut through 2012, has suggested carried interest be used to offset the extension. As carried interest re-emerges as a hot topic of debate in Washington, NMHC/NAA continue to monitor the issue and on Jan. 23 joined a coalition of national real estate organizations to send Rep. Van Hollen a letter noting that any change to the tax treatment of carried interest should be debated as part of comprehensive tax reform.

Return to Top 


SEPTEMBER 20, 2011

Tax Reform Is Inevitable, but Not Imminent

The state of the economy, the nation’s debt crisis and the need for tax reform were recurring topics throughout the meeting as attendees heard from a number of prominent Washington policymakers.  Notably, our meeting was taking place as the Congressional “super committee,” created as part of this summer’s debt deal and tasked with identifying $1.2-$1.5 trillion in federal spending cuts by Thanksgiving, held its first closed-door session.

Rep. Rick Berg (R-ND), a member of the House Ways and Means Committee and a former apartment owner/manager, underscored the importance of strengthening the economy, noting that given the size of the nation’s debt, even a fraction of a percent increase in interest rates could cost more than the savings the super committee is hoping to identify.

We must restore fiscal order, he explained.  Even if we zeroed out all discretionary spending, which is only 40% of the federal budget, “we still barely cash flow.”  Budget cuts won’t resolve this situation.  “The only way to get out is to grow our economy. We need a 5-, 10-, or 15-year plan to reach a balanced budget.  Then, maybe you will see some capital sitting on the sidelines come back to the market,” said Berg.

Opinions were mixed on whether the super committee can actually achieve their objectives.  Rep. Berg said he’s hopeful that as people understand our true financial picture, we’ll reach a point where we say “we’re gonna get this done.”  Still, the dynamics for something like 1986 aren’t there, he added.

NBC Chief White House Correspondent Chuck Todd weighed in with the optimists, saying he believed the impact of the debt limit debacle had created a moment in time to have a protective cocoon for tax reform.

Rep. Pat Tiberi (R-OH), also on the Ways and Means Committee, was not as hopeful.  “Tax policy is complicated and has gotten a lot more complicated since the last reform in 1986,” he said.  “To ask 12 members of a committee to figure it out in six weeks is very difficult.”  He suggested that real progress would require a parallel track of having the House and Senate continue to work on tax reform at the committee level.

Rep. Berg said he opposes a proposed carried interest tax increase.  “If you are going to change that, you need to reduce a tax somewhere else,” he said.   “Carried interest is not about hedge funds, it’s about you—mom and pop operators and real estate partnerships,” agreed Tiberi.

Rep. Tiberi closed by telling members that “You are your most effective advocate,” urging members to meet with their elected officials and making sure they understand how you finance your properties and who ultimately pays the costs of an overly burdensome regulatory environment—your residents.

Return to Top


AUGUST 8, 2011

Debt Limit Bill Omits Carried Interest, For Now

The commercial real estate industry secured a victory when the debt limit bill enacted last week omitted a tax increase on carried interest.  NMHC/NAA and a coalition of organizations had mounted an aggressive public relations campaign to oppose such a change after it was mentioned early in the negotiations by President Obama.

Through media outreach and a coordinated advertising campaign in publications targeting Capitol Hill, we made the case that raising taxes on carried interest isn’t just a Wall Street issue and would have a serious detrimental impact on Main Street. (For more information, visit www.nmhc.org/goto/CarriedInterest.)

The threat of a future tax increase is far from over, however.  The debt limit legislation created a deficit reduction panel of 12 yet-to-be-named members of Congress, which is charged with identifying $1.5 trillion in deficit reduction by Thanksgiving.  Taxes, including carried interest as well as a possible scaleback of the mortgage interest deduction, may again be on the table.

If the panel embraces the carried interest proposal, the threat would be even more serious than in the past because under the terms of the legislation if seven of the 12 panel members agreed on the package of recommendations it would move through the House and Senate under a fast-track procedure that would prevent it from being amended or altered.

NMHC/NAA and our real estate partners will continue to make the case that a carried interest increase would harm our economic recovery and the production of affordable housing.

Return to Top


JULY 26, 2011

NMHC/NAA Issue Carried Interest Alert

As covered in the July 13 Update, President Obama and a number of Congressional Democrats have identified carried interest as a possible revenue source in the debt limit negotiations.

While it is not yet clear if tax increases will play a role in any final agreement, NMHC/NAA are working to ensure that lawmakers understand the devastating impact changing the tax treatment of carried interest would have on real estate, our housing supply and job creation.

We have issued a legislative alert, calling on apartment firms to send letters to their Congressional delegation to oppose a carried interest tax increase.  NMHC/NAA and other organizations also issued a joint press release on July 19 and placed ads in Congressional newspapers Politico, CQ Today and Roll Call bearing the message: “Call it what it is: A Tax Hike on Job Growth and Investment.  And Reject It.”  And we’ve sent letters to Congressional leaders explaining that increasing the tax on carried interest will hurt entrepreneurship, investment in communities and job creation in commercial real estate at a time when the economy is still struggling with a 9.2% unemployment rate.

For more information including an updated quick-reference fact sheet, please visit www.nmhc.org/goto/carriedinterest.

Return to Top


DECEMBER 17, 2010

NMHC News: Tax Bill Passes, No Carried Interest Tax Increase, 1099 Repeal Fail
Tax Bill Includes Apartment Provisions, No Carried Interest Tax Increase

Last night, the House of Representatives passed legislation (H.R. 4853) extending the Bush-era tax cuts for two years.  Since the House did not make any changes to the version that passed the Senate on December 15, the measure now goes to President Obama for his signature. 

The deal includes several tax items of interest to apartment firms.  In a key victory for our industry, the package will not be paid for with an increase in carried interest taxation.  It will continue to be taxed at 15 percent capital gains tax rates instead of higher income tax rates as some have proposed.  NMHC/NAA will remain vigilant on this issue as the threat of a potential tax increase will continue into the new Congress since there are few significant revenue raisers left to pay for Congressional spending proposals. 

The measure includes several items of interest to the business community, including the apartment sector.  They include:

  • Capital Gains/Dividend Tax Rates: A scheduled increase in capital gains tax rates from 15 percent to 20 percent and taxing qualified dividends as ordinary income, up to the top rate of 39.6 percent, will not take place.  Instead the current 15 percent tax rate will be applied to both for two years.

  • Bonus Depreciation:  The package includes full expensing for plant and equipment for 2011 (retroactive to September 8, 2010), up from 50% bonus depreciation in 2010.  Fifty-percent bonus depreciation returns for 2012.  This applies to property that is depreciated over 20 or fewer years.

  • Payroll Tax Credit:  The agreement includes a 2 percentage point payroll tax decrease in 2011, reducing employees’ payroll tax rate from 6.2 percent to 4.2 percent.
Return to Top


DECEMBER 9, 2010

Tentative Deal Reached on Key Tax Issues  

This week, President Obama and Congressional Republicans announced a tentative agreement on extending Bush-era tax cuts for two years. 

Importantly, Congressional Democrats have not yet signed onto the agreement, leaving some uncertainty about the future of this agreement.  While NMHC/NAA expect Congress to enact an extension before adjourning later this month, it is possible that Congress will change elements of the agreement or even adjourn without acting on it, leaving the matter to the 112th Congress. 

The deal also includes several tax items of interest to apartment firms, detailed below. 

  • Carried Interest: In a key victory for our industry, the package will not be paid for with  an increase in carried interest taxation.  It will continue to be taxed at 15 percent capital gains tax rates instead of higher income tax rates as some have proposed. 

  • Estate Tax: The deal includes a two-year solution for the estate tax.  Without Congressional action, the estate tax will revert to its 2001 levels beginning January 1 ($1 million estate exemption, 55 percent tax rate).  Under the agreement, the estate tax would be set at a $5 million exemption and a 35% tax rate for 2011 and 2012.  Importantly, as NMHC/NAA have urged, inherited commercial real estate assets are expected to be subject to stepped-up basis rules (in contrast to the carryover basis rules that prevail in 2010). 

    Although the immediate pressure for Congress to reach an accord on a long-term estate tax has been diminished, it is expected that Congress will continue to debate the issue during the 112th Congress.

  • Capital Gains/Dividend Tax Rates: A scheduled increase in capital gains tax rates from 15 percent to 20 percent and taxing qualified dividends as ordinary income, up to the top rate of 39.6 percent, would not take place.  Instead the current 15 percent tax rate would be applied to both for two years.

  • Income Tax: The current income tax brackets would be extended for all taxpayers for two years. 

  • Bonus Depreciation: The package includes full expensing for plant and equipment for 2011 (retroactive to September 8, 2010), up from 50% bonus depreciation in 2010.  Fifty-percent bonus depreciation returns for 2012.  This applies to property that is depreciated over 20 or fewer years.

  • Alternative Minimum Tax (AMT): The AMT “patch” that shields over 20 million taxpayers from the AMT is extended for 2010 (retroactively) and 2011.

  • Payroll Tax Credit: The agreement includes a 2 percentage point payroll tax decrease in 2011, reducing employees’ payroll tax rate from 6.2 percent to 4.2 percent. 

A plan to extend several expiring tax provisions, including an LIHTC Tax Credit Exchange Program, the Energy Efficient New Homes Tax Credit, the New Markets Tax Credit and brownfields expensing was still being negotiated as Update went to press.

Return to Top


NOVEMBER 12, 2010

The New Congress: New Balance of Power Complicates Industry's Legislative Agenda

When the 112th Congress convenes on January 5, Republicans will control the House and will have eliminated the Democrats' filibuster-proof majority in the Senate.  The result will either be total gridlock or reluctant cooperation on a few issues in advance of the 2012 elections. 

The most obvious impact on the apartment industry's agenda will be in the House, where the Republican takeover means they will control the flow of legislation and will appoint new committee chairmen.

Taxes
Any tax issues not addressed in the lame-duck session will carry over to the beginning of the next Congress.  Beyond those items, tax legislation is expected to be targeted (on issues such as energy incentives) as opposed to sweeping changes over the next two years.  Even without a significant tax bill, the threat of a tax increase on carried interest remains real given the new deficit-reduction mantra on Capitol Hill and the fact that there are few other revenue raisers left.

Return to Top


SEPTEMBER 22, 2010

Carried Interest Back in Play in Senate, but Bill Faces Uncertain Path

As expected, carried interest is back in play in the Senate.  Last week, Senate Finance Committee Chairman Max Baucus (D-MT) introduced a new "tax extenders" bill that is partially paid for by an NMHC/NAA-opposed tax on carried interest. 

The latest carried interest measure mirrors a proposal considered in June.  Beginning in 2011, 75% of a carried interest would be taxed at ordinary income tax rates while the remainder would be taxed at capital gains rates.  If a carried interest had been held for at least five years, a 50/50 split would apply. 

NMHC/NAA have learned that the measure may be modified to mitigate its impact on enterprise value and corporate partners depending on the measure's revenue estimates.  As a result of NMHC/NAA’s strong advocacy, the Baucus bill excludes a provision that would have imposed payroll taxes on service professionals taking distributions from S corporations by classifying such income as wages.  It is unclear whether the new bill will be considered before Congress adjourns for the November election. 

There are also rumors that carried interest may be used to offset onerous 1099 reporting requirements.  (See "1099" Update article.)

NMHC/NAA will continue to mount an aggressive campaign opposing any change to the tax treatment of carried interest. More information on our efforts is available at www.nmhc.org/goto/carriedinterests.

Return to Top


JULY 15, 2010

Senate to Try Again on Tax Extenders-Carried Interest

This week, Senate Majority Leader Harry Reid (D-NV) reported that he will try one more time to pass the tax extenders legislation (H.R. 4213) that is partially paid for by an NMHC/NAA-opposed increase on the taxation of carried interest. 

Senate Democrats failed to pass the measure last month after repeatedly modifying it in an effort to secure the 60 votes needed for passage.  We will continue our aggressive campaign against the carried interest provisions.  For more information on those efforts, visit www.nmhc.org/goto/carriedinterest."


JUNE 25, 2010

Senate Tables Carried Interest Tax Increase for Now

Senate leaders have tabled, for now, a bill extending several popular tax credits (including some of interest to apartment firms) that is partially paid for by increasing the tax rate on "carried interest" or a developer's "promote." The House passed its tax extenders bill (H.R 4123), with a carried interest tax increase, in late May.

Last night, the Senate failed for a third time to secure the 60 votes needed to move the measure forward even after scaling the package down from adding roughly $100 billion to the deficit to just $35 billion.   As part of those changes, Senator Max Baucus (D-MT) twice modified the carried interest proposal to try to make it more palatable to real estate partnerships.

The latest iteration would have taxed 75% of a carried interest at ordinary income rates and 25% at capital gains rates as of 2011.  A carried interest attributable to assets held for at least five years would have been taxed at a 50-50 split.  The language was also modified to exempt family partnerships who allocate carried interests on a pro-rata basis from the tax law change.  Those partnerships would have continued to be taxed at capital gains levels. 

While the most immediate threat appears to have passed, NMHC/NAA remain vigilant as the Senate could take up the extenders bill again in the fall, and carried interest remains a possible "pay for" for other forthcoming legislation. 

For months, NMHC/NAA mounted an aggressive campaign to oppose the carried interest tax increase. We worked directly with key members of Congress to urge a more reasonable ordinary income/capital gains split, arguing that the latest deal will still drive many private developers of affordable rental housing out of the market because the risk/reward ratio has been so dramatically changed for the worse.

In mid-June, NMHC's Carried Interest Task Force leaders Jeff Stack and Tom Moran joined NMHC/NAA staff to meet with several Senators to personally make the case against this onerous proposal. We also published several high-profile full-page ads in Roll Call and Politico, two of the most widely read publications on Capitol Hill.

We thank all of our members who responded to our call to action and contacted their Senators.  Your calls and letters did help make a difference.  We will continue to educate lawmakers against this ill-advised tax law change.

Return to Top


JUNE 18, 2010

Senate Fails Twice to Pass Revised Carried Interest Provision

The Senate spent much of this week attempting to pass a bill (H.R. 4213) extending several popular tax incentives (including some of interest to apartment firms) that is partially paid for by increasing the tax rate on "carried interest."  The House passed its tax extenders bill, with a carried interest tax increase, late last month.  

Unable to secure the 60 votes necessary to pass their original version, Senator Max Baucus (D-MT) twice modified the carried interest proposal to try to make it more palatable to real estate partnerships.  The overall size of the bill was also trimmed to appeal to deficit hawks.  Despite those changes, late Thursday, the bill failed to pass for the second time this week. 

The latest iteration would tax 75% of a carried interest at ordinary income rates and 25% at capital gains rates as of 2011.  A carried interest attributable to assets held for at least five years would be taxed at a 50-50 split.  

The House version of the carried interest tax proposes a 50-50 ordinary income/capital gains split for two years but then provides for a 75-25 split beginning in 2013.  It does not provide separate treatment for long-term assets.  Both bills would apply to all existing and new partnerships and would subject carried interest to the self-employment tax.

The fate of the measure is unclear at this point.  Since one of the key provisions in it is to extend expired unemployment assistance, however, Congressional leaders are expected to keep trying to find a compromise that can secure 60 votes.  That said, Senate leadership is reportedly considering moving unemployment insurance on a separate track, which could reduce pressure to approve the extenders package.

NMHC/NAA will continue our aggressive campaign opposing the carried interest tax increase.  We have been working directly with key Members of Congress to urge a more reasonable ordinary income/capital gains split, arguing that the latest deal will still drive many private developers of affordable rental housing out of the market because the risk/reward ratio has been so dramatically changed for the worse. 

NMHC Carried Interest Task Force members Jeff Stack and Tom Moran were in Washington this week to meet with several Senators.  We also sent a letter to Sen. Baucus, Chairman of the Senate Finance Committee, urging him to modify the proposal to only apply ordinary income rates to 25% of a carried interest on an asset held 10 years or longer.   And we ran high-profile full-page ads this week in Roll Call and Politico, two of the most widely read publications on Capitol Hill. 

Members who have not done so already are urged to contact their Senators to voice their strong opposition.  Our calls are making a difference and it is not too late.

Return to Top


JUNE 4, 2010

Carried Interest Tax Change Passes the House, Pending in the Senate

The battle to defeat a change in the tax treatment of "carried interest" continues.  Just hours before adjourning for the Memorial Day recess, on May 28, the House of Representatives voted 215-204 to change the tax treatment of carried interest to "pay for" a bill that extends dozens of popular tax credit (H.R. 4213).  As late as May 24, both Houses of Congress were expected to expedite passage of the tax extenders bill before the holiday recess, but objections by the Blue Dog Coalition to the deficit-raising cost of the measure delayed House action on the measure for a week.   When House passage became in doubt, the Senate adjourned until June 7 without considering the measure.

Under the House bill, effective January 1, 2011, 50 percent of a carried interest will be taxed at ordinary rates, and 50 percent will be taxed at capital gains rates.  After January 1, 2013, 75 percent of carried interest would be taxed at ordinary income tax rates, and 25 percent at capital gains rates.  The tax law change would be imposed on all existing and new partnerships.  The bill also subjects carried interest to the self-employment tax. The Joint Committee on Taxation said the change is expected to raise $17.7 billion in new revenues over 10 years.

Before adjourning Senate Majority Leader Harry Reid (D-NV) said that there will be a series of amendments offered on the bill, possibly requiring the House to vote on it again before the July 4 recess.  NMHC/NAA have mounted an aggressive campaign to oppose the tax law change, educating lawmakers about the unintended consequences it would have, including stifling the nascent economic recovery and exacerbating the nation's affordable housing shortage.  A grassroots alert requesting members to send letters and make calls to their elected officials has been issued.  More information is available at www.nmhc.org/goto/5731.

Return to Top


MAY 19, 2010

Apartment Industry Ad Campaign and Grassroots Effort on Carried Interest

NMHC/NAA are urging Congress to say 'NO' to a proposed tax increase on carried interest and apartment development with a series of ads appearing in Roll Call and Politico, two of the most widely read publications on Capitol Hill.

The ad seeks to explain to lawmakers that while the carried interest tax increase was originally targeted at Wall Street hedge funds, when you "peel away the onion," you see that it would also have a potentially devastating impact on apartment construction, the affordable housing supply and jobs.                                                                      

We have also mounted a grassroots campaign asking members to flood Congress with calls urging their lawmakers to reject the carried interest tax increase. 

After rejecting such a change for several years, Senate leaders are now seriously considering it to pay for a measure that would extend several expired tax incentives.  The change results from the fact that the "pay for" Senators originally hoped to use for the tax extender bill was instead included in health reform legislation, leaving lawmakers with a financing gap and little "low hanging fruit" remaining.

The ad and information on how you can participate in the grassroots effort are available at www.nmhc.org/goto/5731.


MAY 6, 2010

Carried Interest in Play

 NMHC/NAA are mounting an all-out lobbying campaign against efforts to nearly triple the taxation of carried interest.  A carried interest tax increase has passed the House three times—most recently to pay for legislation extending a number of popular tax provisions that expired last year. 

The proposal has never had enough support to pass the Senate, but Senators are under pressure to reconsider that position after the health care law used $36 billion in offsets in the Senate's version of the extenders bill.  Without a backup source of revenue, the Senate Finance Committee is under serious pressure to relent on carried interest.

To supplement our efforts, NMHC/NAA have hired an outside lobbying firm, and we are mounting a serious grassroots campaign to oppose any tax increase.  Democrats reportedly would like to finish their work on the tax extenders and other items that could tap into carried interest as a "pay for" before the Memorial Day recess, so the next few weeks are critical.

For more information and a sample letter to send to your Senators, please visit www.nmhc.org/goto/5731.

Return to Top


APRIL 22, 2010

Legislative Alert Issued on Carried Interest, Grassroots Action Sought

NMHC/NAA have issued a call to action to oppose changes to taxation of promote interests (also known as "carried interest").  During the next several weeks, Congress will be giving very serious consideration to an Administration-supported proposal that would nearly triple the tax.  This could be potentially devastating to the apartment industry if enacted.  

We need the industry's help to educate Congress about the chilling effect this large tax increase would have on the commercial real estate industry and the damage it would do to local economic development/revitalization efforts throughout the country. 

A sample letter and more information on how to participate in the grassroots campaign are available at www.nmhc.org/goto/5731.

Return to Top


APRIL 8, 2010

Tax Extension Bill and Carried Interest Tax Increase in Play

Congress continues work on legislation to retroactively extend a number of expired tax provisions of interest to the apartment sector (see the March 11 NMHC Update).  Of particular importance, beyond the tax extensions, is how the package will be paid for.

The House and Senate have both passed extender bills (H.R. 4213), but they vary in detail.  The House bill would pay for the extensions by increasing the carried interest tax on real estate partnerships.  The Senate bill uses a "black liquor" provision that taxes an alternative fuel used mainly in the paper industry. 

The final bill was expected to drop carried interest and adopt the "black liquor" provision; however, the new health care bill used "black liquor" as a funding source.  With that revenue source now gone, there is more pressure on House-Senate negotiators to enact the carried interest provision. 

It is unclear how the issue will ultimately be resolved and even unclear how quickly a resolution can be achieved.  NMHC/NAA continue to closely monitor the situation and to actively oppose the carried interest proposals.

Return to Top


MARCH 11, 2010

Tax Extenders Bill Moves Forward, Carried Interest Not Targeted as a "Pay For"

After completing work on a scaled-down jobs bill, Congress has now turned its attention to a one-year extension for several expired tax provisions of interest to apartment firms.  They include: the Tax Credit Exchange Program (TCEP) for the Low-Income Housing Tax Credit (LIHTC) program; New Market Tax Credits; expensing of brownfields cleanup costs; and a number of GO Zone benefits. 

The Senate bill, which was being considered this week, also incorporates a version of legislation supported by NMHC/NAA (S. 1326/H.R. 2995) that allows GO Zone and other disaster area LIHTCs to be eligible for TCEP and extends the placed-in-service date for completion of GO Zone LIHTC projects.  The bill also contains a few clarifications to reduce potential fraud related to the homebuyer's tax credit, which is set to expire in April.

Importantly, unlike the House version of the tax extenders bill, the Senate version does not pay for the tax extensions by increasing the tax on "carried interest" (the "promote") on real estate partnerships.  The bill's passage is complicated, however, by the fact that the White House and House leadership have proposed using its major offsets to pay for future healthcare legislation. 

Senate leaders will be pressured to agree to another offset, but they continue to express serious reservations with the House's carried interest provisions.  It is unclear how this impasse will be resolved.  NMHC/NAA will continue to urge lawmakers not to include the carried interest provisions in the compromise legislation.

In related news, on March 8 the National Association of Counties unanimously adopted a resolution supporting NMHC/NAA’s position, saying, “The National Association of Counties hereby urges Congress and the Administration to maintain the current law-capital gains treatment of “carried interest” used by real estate partnerships.”  In January, the U.S. Conference of Mayors adopted a similar resolution.

 

JANUARY 22, 2010

U.S. Mayors Back NMHC in Fight Against Carried Interest

NMHC’s fight to defeat a proposed near-tripling of taxation on the Promote (Carried Interest) took a huge step forward this week, as the Executive Committee of the U.S. Conference of Mayors unanimously adopted a resolution to "respectfully urge Congress and the Administration to maintain the current capital gains tax treatment or classification for tax purposes of promoted or carried interest used by real estate partnerships."
 
The passage of this resolution, which was sponsored by Mayor Joseph P. Riley, Jr. of Charleston, SC, is great progress toward NMHC’s goal of educating Congress about the extremely negative consequences the proposed tax increase on Carried Interest would have on "main streets" throughout the country. 

The mayors group’s resolution resulted from an intense local lobbying effort conducted by NMHC and other groups including ICSC, NAIOP, and BOMA International.  NMHC staff and members traveled throughout the country to meet personally with and educate mayors about this resolution opposing a Carried Interest tax increase. 

The U.S. Conference of Mayors’ assistance could be extremely influential; the group’s members are extremely well-connected with Congress and the Obama Administration.  Additionally, this action by the Conference of Mayors will add momentum to NMHC’s effort to engage other state and local government organizations such as the National Association of Counties and the National League of Cities as well as the various governors' associations.

Return to Top


DECEMBER 10, 2009 

Tax Extender Bill Passes House, Triples Taxation on "Carried Interest"

On December 9, the House of Representatives passed a roughly $30 billion bill (H.R. 4213) extending dozens of tax provisions set to expire at the end of the year, including the NMHC/NAA-supported provision that allows firms to expense costs associated with cleaning up brownfield sites.  It would also extend for one year the Tax Credit Exchange Program (TCEP) that allows state housing agencies to exchange up to 40% of their LIHTC allocation for cash grants from the Treasury Department.  (A summary of the bill is at http://bit.ly/5OlSiC.)

Unfortunately, the bill pays for the tax extensions with a major tax increase on real estate partnership "carried interest" or the developer's promote.  Specifically, the measure would tax carried interest at ordinary income tax rates instead of as a capital gain as current law provides.  Opposing the carried interest tax increase proposal has been a top priority for NMHC/NAA for several years.

Originally designed as a way to rein in wealthy hedge fund managers, the legislation is written so broadly that it would affect all real estate partnerships.  We have been educating lawmakers about the unintended consequences the proposal would have on the nascent economic recovery and the struggling commercial real estate markets.

A carried interest tax increase has passed the House twice, but has never had enough support to pass the Senate and is unlikely to be included in the Senate tax extenders bill.  It is also unclear whether the Senate will take up the tax extenders measure before December 31, given the high-profile healthcare debate.  In past years, Congress has retroactively extended many tax provisions that expired before lawmakers could pass an extenders bill.

Even without Senate support this year, a carried interest tax increase will be on the table again next year when lawmakers begin debate on an overhaul of the tax code.

Return to Top


OCTOBER 19, 2009

The Promote ("Carried Interest") a Target to Pay for Tax Extenders

On October 14, House Ways and Means Committee Chairman Charles Rangel (D-NY) said he is planning to consider three major tax bills—tax extenders, estate tax and economic stimulus—before the end of the year.  Importantly, the panel plans to revive an effort to change the tax on a real estate partnership's promote (also known as "carried interest") to pay for the measures.

NMHC is aggressively opposing proposals to tax carried interest as ordinary income (scheduled to rise to 39.6% in 2011), rather than at the current 15% capital gains tax rate.  Congressional proponents see the change as a way to rein in wealthy hedge fund managers, but prior versions have been written so broadly that they would affect all real estate partnerships.

We continue to coordinate a strong effort with other affected real estate organizations to educate lawmakers of the unintended consequences such a tax law change would have, including stifling the nascent economic recovery and exacerbating the nation's affordable housing shortage.  Additional information on carried interest is available at www.nmhc.org/goto/CarriedInterest.

A carried interest tax increase has passed the House twice, but has never had enough support to pass the Senate.  Unlike in the prior Congress, however, the measure has the support of President Obama, and Senate Democrats now have a filibuster-proof majority.

Return to Top


MAY 14, 2009

Obama Administration Budget and Carried Interest

The Obama Administration released details of their FY 2010 revenue proposals on May 11 in a document commonly referred to as the “Green Book.”  As expected, the FY10 Green Book includes a plan to change the taxation of carried interest by applying ordinary income taxes to the “carry” or “promote” earned by the general partner in a real estate partnership arrangement.  This proposal is similar to pending legislation (H.R. 1935) that NMHC has been actively opposing for months.

Return to Top


APRIL 9, 2009

Carried Interest Legislation Re-Introduced

As expected, raising taxes on carried interest continues to be a target for lawmakers. On April 3, Representative Sander Levin (D-MI) reintroduced legislation (H.R. 1935) that would tax carried interest compensation of real estate, hedge funds and private equity firms as ordinary income and not as capital gains, as it is currently taxed. Such a change is also supported by President Obama, who included a comparable proposal in his FY 2010 budget blueprint.

NMHC has been aggressively lobbying in opposition to the proposed changes in the taxation of carried interest for several years. In recent weeks we have met with several lawmakers, targeting both leadership and rank-and-file members of the House and Senate, explaining that not only is such a tax law change inappropriate, but it would also have numerous unintended consequences, including exacerbating the nation’s affordable housing shortage.

A similar bill passed the House in 2007 and 2008 but stalled in the Senate. The newly introduced legislation is significantly more detailed than previous versions of the bill, however. It makes a number of refinements to address technical tax issues raised by various parties, including the New York State and American Bar Associations.

Specifically, the bill includes new provisions relating to procedures for determining the level of return attributable to any capital contributions made to the partnership by the general partner as well as rules governing initial grants of investment services partnership interests to general partners, loans provided to general partners by other partners, and self-employment taxes imposed on the carried interest amounts received by the general partner.

It also imposes significant 40 percent strict liability penalties if carried interest income is underreported to the IRS.

In an encouraging sign, both Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) recently expressed their belief that the current economic climate will make passage of the proposal in 2009 less likely. The Obama Administration, however, continues to express its plans to push for swift enactment of the proposal, and the introduction of the new bill in the House is a strong indicator that proponents of the tax law change will continue to push for its adoption.

Return to Top


APRIL 3, 2009

NMHC Campaign Opposes Carried Interest Tax Increase

NMHC has rolled out an aggressive lobbying campaign to oppose proposed changes in the taxation of carried interest (i.e., "the promote") after President Obama’s budget blueprint proposed a 160 percent tax increase on carried interest beginning in 2011—increasing the tax from the current capital gains rate of 15 percent to ordinary income tax rates, which are proposed to increase to 39.6 percent.

In recent weeks we have met with several lawmakers, targeting both leadership and rank-and-file members of the House and Senate, explaining that not only is such a tax law change inappropriate, but it would also have numerous unintended consequences, including exacerbating the nation’s affordable housing shortage.

The proposal passed the House of Representatives (but not the Senate) on a largely party-line vote in both 2007 and 2008.  In an encouraging sign, both Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) of the Senate Finance Committee recently expressed their belief that the current economic climate will make passage of the proposal in 2009 less likely.  The Obama Administration, however, continues to express its plans to push for swift enactment of the proposal.

Return to Top


MARCH 5, 2009

Tax Policy: Obama Budget Targets Carried Interest, Mortgage Interest Deduction

Last week, President Obama unveiled the blueprint for his $3.55 trillion 2010 budget.  While the full details will not be known for weeks, the 134-page snapshot highlights his plans to raise taxes on upper-income households in part to be able to invest in health care, energy independence and education.  Of interest to the apartment sector, the plan increases funding for the U.S. Department of Housing and Urban Development (HUD) and imposes limitations on the mortgage interest tax deduction.  It also includes a number of tax provisions that would affect apartment firms, including an NMHC-opposed provision to change the taxation of “carried interest.” 

Following through with Obama’s campaign pledge to increase taxes on the highest-income taxpayers, the budget proposes increasing the top marginal income tax rate to 39.6 percent and the tax rate on capital gains and dividends for those earning over $200,000 ($250,000 for married filing jointly) would rise to 20 percent.  In addition, taxpayers in this income bracket will see many of their itemized deductions limited.  Perhaps most importantly, the plan includes an onerous proposal that would change the taxation of “carried interest,” also known as the “carry” or “promote.”

Carried Interest.  While details of the Administration’s carried interest proposal are not expected for weeks, it will likely mirror, or perhaps broaden, a proposal that NMHC has vigorously and thus-far successfully opposed.  Earlier proposals, passed twice by the House of Representatives but blocked by the Senate, would tax carried interest income at ordinary income tax rates of up to 35 percent (or up to 39.6 percent under the White House budget proposal).  Currently, carried interest is taxed at the 15 percent capital gains tax rate.

Democrats originally proposed the change as a way to reign in hedge fund and venture capital managers, but the measures have been broadly written to cover many partnerships in other industries, including 2.5 million real estate partnerships.  NMHC and others have argued for a carve-out for real estate partnerships, but Treasury officials said the Administration would not limit the provision’s scope but would target all carried interest arrangements.  As with most of the revenue-raisers in Obama’s budget, the carried interest tax hike would not take effect until 2011 to avoid interfering with a hoped-for economic recovery.

Net Operating Losses.  In a win for business, the measure includes an expanded net operating loss (NOL) carry-back period, which was limited in the stimulus to apply only to small businesses with less than $15 million per year in revenues.  
The budget document is available at www.nmhc.org/goto/5065.

Return to Top


FEBRUARY 19, 2009

Carried Interest

While carried interest has received little legislative attention so far this year, NMHC remains vigilant for proposals that would change the taxation of carried interest to "pay for" other tax or spending measures.  We have helped defeat such measures the past two years, but they are supported by both the House Democratic leadership and President Obama.  In a positive development, however, the economic stimulus bill (H.R. 1) enacted February 13 included a one-year patch for the Alternative Minimum Tax (AMT).  This will significantly reduce pressure on lawmakers to increase taxes on carried interest profits as the carried interest provision is often cited as one way to pay for AMT relief.

Return to Top


FEBRUARY 3, 2009

Economic Stimulus Measure Includes Multifamily Provisions

Responding to the President's call for "swift and bold" action, Congressional Democrats have put the massive $800-$900 billion stimulus package on a fast track for enactment.  The House passed its version of the measure, the American Recovery and Reinvestment Act Bill of 2009 (H.R. 1) last Wednesday on a straight party line vote.  As Washington Update went to press, the full Senate was debating its version and was expected to make changes to the package.  Assuming Senate passage, lawmakers will still have to resolve the significant differences between the two versions.

While the package is mainly focused on non-real estate issues, there are several provisions of interest to apartment firms, including several tax provisions related to net operating loss, bonus depreciation, cancellation of indebtedness and enhancements to the Low-Income Housing Tax Credit.   It also authorizes energy-efficiency tax incentives and increased funding for the Section 8 program and lead-based paint abatement.   A summary of the apartment-related elements of the two bills is available at www.nmhc.org/goto/5038 and will be updated to reflect final action on the Senate floor this week.  President Obama has asked Congress to complete action on the package by February 16.

Return to Top

Printer-friendly format   E-mail this page

Related Content

Related Resources