Source: National Multifamily Housing Council
July 28, 2022
July 29, 2022 |
Updated February 6, 2023
On July 27, Senate Majority Leader Charles Schumer (D-NY) and Senator Joe Manchin (D-WV) reached agreement on reconciliation legislation that would raise $739 billion, in part by tightening rules on carried interest.
Below are frequently asked questions intended to address inquiries as to the potential implications of this legislation on the multifamily industry.
The information provided herein is general in nature and is not intended to be legal advice. It is designed to assist our members in understanding this issue area, but it is not intended to address specific circumstances or business situations. For specific legal advice, consult your attorney.
What is the carried interest holding period under current law?
The current-law carried interest holding period is 3 years. However, 1231 gains are accorded long-term capital gains tax treatment if held for one year.
What does the proposed Inflation Reduction Act of 2022 do with respect to carried interest?
The proposal would do the following:
- Redefine what is in the base for purposes of carried interest by including 1231 gains
- Extend the general carried interest holding period to 5 years
- Provide a special exception that brings the carried interest holding period to 3 years for real property trades or businesses.
The bottom line is that the real estate carried interest holding period goes to 3 years.
Are there other issues with the drafting of the provision?
Yes. First, the proposal would not start the 3-year clock until the later of when all of a fund’s assets are acquired, or until a partner acquires substantially all of an interest in the partnership. Additionally, transfers of a carried interest would become a recognition event.
The proposal would generally extend the three-year holding period required for carried interest to be taxed as a long-term capital gain (as opposed to a short-term capital gain and, thereby, taxed at ordinary income rates) to five years. However, carried interest attributable to a real property trade or business would retain a three-year holding period requirement. Under this proposal, 1231 real estate gains that are currently accorded long-term capital gains treatment if held for at least a year would be subject to the three-year holding period. Notably, the three-year holding period will remain in effect for taxpayers with an adjusted gross income of less than $400,000.