WASHINGTON, DC-Senate Democrats are close to an agreement that would scale back the proposed tax rate changes to carried interest in a bill passed by the House of Representatives at the end of May. A new version of the Senate’s tax extenders bill--which contains the carried interest proposal--has been introduced.
In it, the current rate of 15%--the capital gains rate--would remain in place for 2010. For 2011 and 2012, half of the carried interest profit would be taxed at the ordinary income rate and half at the capital gains rate for an effective tax rate of 30%. In 2013, that blend would shift to 65% taxed at the ordinary income rate and 35% at the capital gains rate for effective tax rate of 32.7%. In addition, an exception has been carved out for long-term holders of real estate. If an asset is held for seven years or more, the formula would be 55% ordinary tax rate and 45% capital gains tax for an effective rate of 30.7%.
The House voted for a tax rate of 35%, with no consideration for long-term assets. The House included this proposal in a $115-billion jobs bill that extends unemployment, among other measures. It is expected to raise more than $17 billion in tax revenue over the next decade.
This latest push to change the tax characterization of carried interest began when the Obama administration proposed taxing the entire amount at ordinary income rates. The House modified it to 75% and now the Senate has modified it further. Intense industry lobbying associations representing the real estate, private equity and other business sectors, is responsible for the changes. "As members of Congress increasingly understand that carried interest is not just about hedge funds and private equity but that it is also a dramatic increase in taxes for real estate, the rate has steadily gone down as process moved forward," Real Estate Roundtable CEO Jeff DeBoer tells GlobeSt.com.
The latest proposed rate is still quite high compared to current law, he goes on to note. "We think it is still a destructive tax and we are continuing to work to improve it and provide further recognition and benefits for long-term holders of real estate. If not outright kill it."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
