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WASHINGTON, DC-On Friday, the House of Representative passed a $78.3-billion measure that would shield some 21 million people from the alternative minimum tax. It has paid for the bill, though, with a provision that more than doubles--from 15% to 35%--the tax rate on carried interest.

The prospect for passage in the Senate is less certain--but even if the measure fails this year in that legislative body, it could be introduced again in the next session. In short, the real estate industry and related financial sector services are becoming more nervous as prospects for this proposal becoming law become more real.

If this indeed happens, it would have a disproportionate affect on the real estate industry as a near majority of all partnerships formed that report to the IRS are from this sector, according to the Real Estate Roundtable. This Washington, DC-based group also recently commissioned a study that found such a tax would have a $20-billion impact on the economy.

Worse case scenarios are already being contemplated. "What scares everybody is the analogy to the changes in the 1986 tax laws whose goal was to eliminate tax shelters but had the unexpected result of prompting one of the biggest real estate market collapses ever," Adrian Zuckerman, head of Epstein Becker and Green's real estate practice, tells GlobeSt.com.

To be sure, this law is hardly a done deal. Also, not every segment of the real estate industry would be hard hit, Brian Donnelly, a partner at Farella Braun + Martel, points out. "It is important to note that any 'carried interest' legislation would likely not have great impact on the already reeling home building industry," he tells GlobeSt.com. "For the most part, home builders hold their real estate as 'inventory,' and, accordingly, recognize ordinary income--and not capital gain--when this property is sold."

Not all partnerships are created equal as well, he continues. "Any 'carried interest' legislation will likely impact smaller, regional commercial real estate developers that often have to provide added compensation incentives to attract top notch talent."

The real estate industry, though, is sufficiently alarmed to pull out all stops in its lobbying endeavors. And in a statement shortly after Friday's vote, the National Association of Home Builders warned the proposal could have a significant negative impact on both the multifamily housing industry and the bottom lines of companies that use real estate investment partnerships.

Instant Insights /

House Approves Carried Interest Tax

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