Capital Gains—Carried Interests - Issue Summary
What is the fundamental issue? |
Most real estate partnerships, particularly those engaged in real estate development, are organized with general partners, who contribute their expertise (and, occasionally, some capital) and limited partners who contribute money and property (capital) to the enterprise. Generally the profits of the partnership are divided primarily among the limited partners who contribute capital. A common practice among real estate partnerships, however, is to permit the general partner to receive some of the profits through a "carried interest," even when the general partner has contributed little or no capital to the enterprise. The general partner's profits interest is "carried" with the property until it is sold.
During the time that the real estate is held, the general partner receives compensation in the form of ordinary income. The limited partners receive both ordinary income from operations and capital gains income from any profits generated during the year. When the property is sold, the limited partners receive their profits distributions (the earnings on the capital they have invested) as capital gains. The general partner also receives the value of its carried interest as capital gains income.
Congress has proposed treating the income from the carried interest as ordinary income. |
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I'm a Realtor®. What does this mean to my business? |
A residential real estate sales agent and/or broker will not be directly affected by the proposal, as it applies only to real estate partnerships that have carried interests. Real estate brokerage rarely is organized in that form. Real estate investment, however, is typically held in partnership form. Not all partnerships include both general and limited partners or carried interests for the general partners, but investments that are held in that form would be harmed by the proposal. By increasing the tax burden on these real estate partnerships, the proposal would make real estate a less attractive investment. When the value of real estate investment is impaired, there is an indirect impact on all real estate. Thus, all REALTORS have a stake in this proposal. |
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NAR Policy: |
NAR opposes any proposal that would eliminate capital gains treatment for any carried interest of a real estate partnership. Rationale: Utilization of the carried interest mechanism for real estate partnerships is a standard operating practice that has not, historically, been seen by either courts or policy makers as a "loophole." Rather, capital gains treatment for income from a carried interest is seen as a reward for entrepreneurs who take the risks inherent in new projects and in making capital investments. |
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Legislative/Regulatory Status/Outlook: |
While the carried interests legislation originated in the House, only the Senate Finance Committee has held hearings on the subject. Despite progress that NAR and other groups have made in communicating opposition to the bill, the issue is likely to continue to fester. The proposal was driven by the extraordinary amounts of money that private money managers have realized during the recent Blackstone and similar public offerings. Congress will continue to debate whether money managers should receive capital gains treatment for their partnership carried interests. Unless and until money managers are isolated as the only industry affected by the legislation, the debate and controversy for real estate investment will continue. House and Senate leaders, including Finance Committee Baucus (D-MT) have all promised further discussion, possibly into 2008. |
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Legislative Contact: Linda Goold, lgoold@realtors.org, 202-383-1083
Legislative Contact: Helen Devlin, hdevlin@realtors.org, 202-383-7559
Regulatory Contact: Jeff Lischer, jlischer@realtors.org, 202-383-1117
Media Contact: Mary Trupo, mtrupo@realtors.org, 202-383-1007 |
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Link to Thomas |
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