August 4, 2022 Update
In a major victory for the multifamily industry, Senate Democrats on August 4 reached agreement to move forward on reconciliation legislation without a provision that would change the tax treatment of carried interest. The multifamily industry successfully worked to oppose a proposal that would have imposed a three-year holding period for carried interest attributable to real property trades or businesses.
Key to the removal of the carried interest provision was Senator Kyrsten Sinema (D-AZ). NMHC worked with multifamily industry members who develop properties in Arizona to educate Senator Sinema about the devastating impact the proposal to extend carried interest holding periods would have had on housing production. NMHC also joined real estate partners in a letter explaining the proposal’s detrimental impact.
Next Steps: The House is set to take up the legislation on August 12, where it is expected to pass.
On July 27, Senate Majority Leader Charles Schumer (D-NY) and Senator Joe Manchin (D-WV) reached agreement on reconciliation legislation that would raise $739 billion, that would have tightened the rules on carried interest.
Below are frequently asked questions that were intended to address inquiries as to the potential implications of this legislation on the multifamily industry.
The information provided herein is general in nature and is not intended to be legal advice. It is designed to assist our members in understanding this issue area, but it is not intended to address specific circumstances or business situations. For specific legal advice, consult your attorney.
The current-law carried interest holding period is 3 years. However, 1231 gains are accorded long-term capital gains tax treatment if held for one year.
- Redefined what is in the base for purposes of carried interest by including 1231 gains
- Extended the general carried interest holding period to 5 years
- Provided a special exception that brings the carried interest holding period to 3 years for real property trades or businesses.
The proposal would have done the following:
The bottom line is that the real estate carried interest holding period goes to 3 years.
Yes. First, the proposal would not have started the 3-year clock until the later of when all of a fund’s assets are acquired, or until a partner acquires substantially all of an interest in the partnership. Additionally, transfers of a carried interest would have become a recognition event.
The proposal would generally extend the three-year holding period required for carried interest to be taxed as a long-term capital gain (as opposed to a short-term capital gain and, thereby, taxed at ordinary income rates) to five years. However, carried interest attributable to a real property trade or business would retain a three-year holding period requirement. Under this proposal, 1231 real estate gains that are currently accorded long-term capital gains treatment if held for at least a year would be subject to the three-year holding period. Notably, the three-year holding period will remain in effect for taxpayers with an adjusted gross income of less than $400,000.