The Promote structure is widely used by real estate partnerships as a way to share profits between general and limited partners and as a means to ensure that the interests of the general partner are aligned with the interests of the limited partner investors. It is recognized as a rational way to distribute the long-term capital gain upon the sale of a property.
It is estimated that over $1.3 trillion is invested in real estate through partnerships and that the majority of these partnerships use a Promote structure. The structure is the norm for developing office parks, industrial buildings, apartments, shopping centers and downtown office buildings. For instance, one recent analysis of the apartment communities developed in Los Angeles County in 2008 shows that more than half were built by partnerships using a Promote structure.
Unfortunately, the Promote structure could become collateral damage in policymakers’ attempts to rein in Wall Street hedge fund asset managers. Congress and the Obama Administration are considering taxing Wall Street “carried interest” as ordinary income rather than as a capital gain.
However, the term "carried interest” is defined so broadly in the proposed legislation that the Promote structure used by real estate partnerships would also be subjected to a tax increase in excess of 150 percent. Such a change would have devastating effects on the commercial real estate industry, would dampen the industry's economic recovery, would affect the tax revenues of many state and local governments and would worsen the nation’s shortage of affordable housing.
This white paper analyzes the proper tax treatment of the Promote.
- Carried Interest
- IRS Issues Guidance on How to Report Carried Interests
- Real Estate Coalition Letter to House Ways and Means Oversight Subcommittee Regarding Proposed Tax Proposals
- House Clears Budget Legislation—Clearing Path for $3.5 Trillion “Human Infrastructure” Package
- Real Estate Industry Reiterates Potentially Devastating Impact of Proposed Carried Interest Modifications