President Donald Trump has signaled his intention to eliminate the carried interest tax break, a decision that could have far-reaching implications for the financial sector and commercial real estate industry. During a recent meeting with Republican lawmakers, Trump outlined his tax priorities, placing the elimination of this long-standing loophole at the forefront of his agenda.
The carried interest provision, which allows investment fund managers to pay a lower capital gains tax rate on a significant portion of their income, has long been a contentious issue in American tax policy. Critics argue that it unfairly benefits wealthy fund managers at the expense of ordinary taxpayers, while supporters claim it incentivizes long-term investment and economic growth.
Trump's renewed focus on this issue comes as a shock to many observers, despite his previous attempts to address the loophole during his first term. But in the end, the 2017 Republican tax bill only modified the rules, extending the holding period required for preferential tax treatment from one year to three.
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The potential elimination of the carried interest loophole is expected to significantly impact the commercial real estate sector, which heavily relies on this tax deduction. Many property developers benefit from the current tax structure, and any changes could alter investment strategies and property valuations across the industry. Indeed, real estate partnerships comprise a large portion of partnerships using carried interest structures, with 49.6% of all partnerships being real estate-related.
Concurrent with Trump's announcement, a group of Senate Democrats reintroduced legislation to close the carried interest loophole, highlighting the bipartisan nature of this issue. Senator Tammy Baldwin of Wisconsin expressed her support for Trump's stance, stating on social media, "Perfect timing. I introduced a bill today to end the carried interest loophole and make Wall Street investors pay their fair share. Glad you agree, @POTUS. Time to get this done".
The Congressional Budget Office estimates that taxing carried interest as ordinary income could reduce the deficit by $13 billion over ten years, providing a potential offset for other tax cuts Trump seeks to extend from his 2017 reforms.
The private equity industry, which has successfully lobbied to preserve the carried interest provision in the past, is bracing for a challenging fight. "The battle over carried interest is likely going to be the toughest yet,” a strategist who works closely with the private equity industry told the Financial Times. “Trump wanted it gone in 2017 and was stymied by Congress, but today's congressional Republicans hardly resemble darlings of high finance and are far more willing to fall in line behind the president.”
If the loophole is closed, private equity firms may need to reevaluate their compensation structures, potentially ending practices such as fee waivers that convert management fees to carried interest for tax benefits. The change could also impact recruitment in the industry and create a more level playing field for banks and other financial institutions competing for talent.
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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.
