Senator Tammy Baldwin (D-WI) and Representative Bill Pascrell (D-NJ) on March 13 introduced potentially harmful legislation to tax carried interest as ordinary income instead of a capital gain. While passage of this tax increase on carried interest is not imminent, it could be used to offset future tax proposals. NMHC and NAA will continue to educate lawmakers about the devastating impact this $14 billion tax proposal would have on the development of multifamily housing and on housing affordability throughout the nation.
Current tax law treats carried interest as a long-term capital gain if the underlying asset is held for at least three years. NMHC and NAA strongly opposed extending the one-year hold period to three years as part of tax reform legislation enacted in 2017. Notably, those who fall under Section 1231(b) do not appear to be impacted by the three-year holding period. NMHC and NAA strongly oppose making any further changes that would increase taxes on real estate entrepreneurs and believe that a one-year holding period should apply to carried interests.
Carried interest should receive capital gains tax treatment because it represents a return on an underlying, long-term capital asset, as well as risk and entrepreneurial activity. This is in contrast to any fees that managing partners receive in payment for operations and management activities, which are taxed as ordinary income. A higher tax rate on long-term capital gains will discourage real estate partnerships from investing in new construction at a time when demand for apartments continues to grow and chronic underbuilding has limited new housing supply. In fact, research commissioned by NMHC and NAA shows that the nation will need 4.6 million new apartments by 2030.