House Bill Would Hike 'Carried Interest' Tax

Washington, DC, November 16, 2007--Last week the U.S. House of Representatives passed a $82.5 billion tax bill that contains a massive tax increase for partnerships, raising the tax rate on “carried interest” from 15% to 35%.

H.R. 3996 also extends some expiring tax breaks such as leasehold depreciation and brownfields remediation expensing. It also provides some relief from the alternative minimum tax.

International Council of Shopping Centers (ICSC) has actively lobbied against the tax hike on “carried interest” because of its potentially significant negative impact on commercial real estate. Carried interest — sometimes called simply “carry” — is the share of profits the general partners of a fund or a limited or limited liability partnership receive as compensation, despite not contributing any initial funds. Typically, general partners also take management fees, but that is already classified as ordinary income.

While the “carried interest” provision is aimed at closing a supposed loophole for private equity managers and venture capitalists, the commercial real estate community, much of which is organized in partnerships, will bear the brunt of this offset, real estate executives say.

Because the clock is ticking for alternative minimum tax relief this year, the Senate may bring up some form of the bill before it adjourns in December, although it may not be able to pass the bill with the carried-interest provision, observers say. The White House has also threatened to veto the legislation if the Senate does pass it.