Real Estate Industry Groups Warn of Severe Economic Impact from Proposed Tax Increase on Partnership ‘Carried Interest’ Return

Real Estate Industry Groups Warn of Severe Economic Impact from Proposed Tax Increase on Partnership ‘Carried Interest’ Return

WASHINGTON, Nov 2 /PRNewswire-USNewswire/ — A proposed tax increase on a partnership’s long-term investment return that was approved yesterday by the House Ways and Means Committee poses a severe economic threat to economic growth, jobs and the tax base, according to a group of twelve national real estate organizations.

In a letter sent November 1st to all members of the House Ways and Means Committee, The Real Estate Roundtable (http://www.rer.org) and 11 industry partners strongly denounced a provision in “The Temporary Tax Relief Act of 2007” (H.R. 3996) that would increase the tax treatment of a partnership’s “carried interest” return from the current capital gain rate (15%) to the ordinary income rate (35%).

A carried interest is the amount a general partner is compensated by other investing partners for successfully managing a long-term venture such as a real estate asset. Carried interest is paid if the property appreciates in value over the life of the investment. A general partner’s carried interest is given in addition to reasonable management fees and any return that partner may also receive for their own investment contributions to the venture.

“This ill-conceived tax hike on specific entrepreneurial investment partnerships may reach a House vote in early November, so it is imperative that policymakers fully understand this is the most significant and potentially most disruptive tax on real estate since the 1986 Tax Reform Act,” said Roundtable President and CEO Jeffrey D. DeBoer. “The change in tax treatment of carried interest unfairly hits real estate entrepreneurs throughout the country while leaving other business enterprises using the same investment partnership model unscathed. It amounts to permanent tax unfairness in the guise of a ‘Temporary Tax Relief Act.’ ”

The letter emphasizes the damage such a tax increase would impose on housing and financial markets already reeling from the subprime mortgage market crisis, particularly in distressed communities where higher risk investment is especially needed. The 12 organizations state in the letter, “We have explained that partnerships are the predominate business model used in real estate development, ownership and investing of all types – from office buildings, apartments and shopping centers to senior housing and small duplexes. Real estate partnerships subject to this tax hike hold nearly one quarter of all investment real estate in America – well over $1 trillion. The real estate industry creates millions of jobs each year and is the primary source for local tax revenues that support the services that make our local communities successful. A tax increase on real estate entrepreneurs across the country of over 133% will have a pervasive effect on jobs, economic growth and the tax base.”

While the letter also supported the Tax Act’s proposed extension of Alternative Minimum Tax (AMT) relief and other important expiring tax provisions, it focused on the carried interest proposal, noting that it represents a tax increase of more than $1 billion annually on real estate investment ownership and development “that does not begin to measure the cost of lost economic benefits that will ripple through communities across the country.”

The Real Estate Roundtable (http://www.rer.org) brings together chief executives from top U.S. real estate entities and leaders of real estate industry trade associations to develop broad-based positions on big-picture policy issues relating to real estate and the national economy. Collectively, its members’ portfolios contain over 5 billion square feet of office, retail and industrial properties valued at more than $700 billion; over 1.5 million apartment units; and in excess of 300,000 hotel rooms. Participating trade associations represent more than 1 million people involved in virtually every aspect of the real estate business.

SOURCE Real Estate Roundtable

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