The battle over carried interest is heating up again in Washington. In a speech to the Business Roundtable on September 16, President Obama repeated his long-time call for carried interest to be taxed at ordinary income rates of up to 39.6 percent - instead of at current-law capital gains rates that go up to 20 percent. On the campaign trail, Republican presidential candidates Jeb Bush and Donald Trump have also endorsed the move. But the multifamily industry continues to strongly and effectively oppose any proposals to change the tax treatment of carried interest.
That’s because carried interest has been a fundamental part of real estate investment partnerships for decades. Managing partners receive a carried interest, or a share of profits once an asset is sold, recognizing the value they bring to the venture and the risks they take. A higher tax rate on long-term capital gains will discourage real estate partnerships from investing in new construction. In particular, at this time when demand for apartments continues to grow and chronic underbuilding has limited new housing supply.
NMHC/NAA are reminding lawmakers of the key role that entrepreneurial risk plays in developing properties. And our ongoing efforts have helped to keep the carried interest proposal at bay. In fact, House Ways and Means Committee Chairman Paul Ryan (R-WI) in May took carried interest off the table until 2017. That’s on the individual side of the code, so it’s not something that we’re looking at right now,” said Ryan. “That’s what we see as a 2017 conversation.” And the Senate voted 43-55 on July 16 to kill a carried interest amendment offered by presidential candidate and Senator Bernie Sanders (I-VT).
Looking ahead, there’s a possibility lawmakers could look to carried interest as a way to offset tax or spending proposals. But there’s also some chance that the real estate industry might be carved out of any change. For example, former House Ways and Means Committee Chairman Dave Camp (R-MI) agreed to exclude real estate in his mammoth tax reform bill introduced in the last Congress. And Senator Charles Schumer (D-NY) also seemed 0pen to limiting the proposal recently - even though he has long favored applying the tax change to all industries.