WASHINGTON, DC-The next 30 to 45 days will be a crucial period for thecommercial real estate industry on Capitol Hill: it is over thisperiod of time that the House of Representatives and the Senate decidewhether to change the tax characterization of carried interest.This potential threat seems to loom large every few years, usuallywhen one political party decides changing its characterization wouldmake a good source of additional revenue. This year, for that reason,the risk is especially great, says Real Estate Roundtable Jeff DeBoer,in comments made during the Washington RealShare conference, held Tuesday.

“What we have now is a situation where the House bill on tax extendersneeds to be conferenced but the revenue sources in the Senate bill aregone,” he tells GlobeSt.com. “The temptation to adopt the House provisions on carriedinterest will be significant.”

To fully understand the stakes some background is in order, startingwith the tax characterization of carried interest itself.Carried interest is the percentage of a fund, joint venture orlimited partnership’s profits that a general partner takes ascompensation. Many real estate partnerships are structured around thisconcept, with developers taking much of their compensation this way in lieu of a salary. These proceeds are taxed at the capital gains tax rate of 15%. Changing that characterization to ordinary income would essentially triple the tax rate.Even with a working capital market system and robust commercial real estate environment, the carried interest proposal has been viewed as a serious threat tofunding real estate. A Real Estate Roundtable study in 2007 found thatthe cost of the proposal to the industry could reach as much as $20billion.

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