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The industry–and other interested parties, apparently–dodged a bullet in the past few weeks as the long-feared carried interest tax-hike proposal was dropped from the alternative minimum tax bill. In its “Weekly” e-newsletter, the Washington, DC-based Real Estate Roundtable labeled carried interest “onerous” and explained that it would raise “the tax rate on general partners’ carried interest by about 150%. If enacted, carried interest would no longer be treated as capital gain (subject to a 15% rate), but would instead be taxed at the 35% ordinary income tax rate, and would be subject to FICA taxes.”

But don’t lay your weapons down just yet. Jeff DeBoer, RER’s president and CEO, fully expects the measure to resurface again in 2008. So called “Paygo” rules will breathe new life into the tax proposal–a good thing for the feds as they root around for ways to subsidize cuts elsewhere in the budget. It’s a decidedly bad thing, however, for the industry. In the following exclusive interview, DeBoer surveys the political landscape and tells us what he sees on the horizon. (You can access an analysis on the impact of carried interest on RER’s website.)

GlobeSt.com: What exactly is at stake here?

DeBoer: What’s at stake is the fundamental taxation rules that relate to the primary business model that has been used for decades by people to own, operate and develop real estate. The model holds a little over one-quarter of all commercial real estate in America–in excess of a trillion dollars. The proposal is actually not targeted at the real estate business or even the real estate general partner but at something entirely different. But we were dramatically affected by it. The headlines talked about hedge-fund operators and private-equity fund managers. But when one, so to speak, pulls back the kimono on this proposal, you discover that real estate general partners–regardless of size, location or property type–were themselves being painted with the same brush as the mega hedge-fund manager. At the time of our meeting in June, we were already starting to see some bleeding over from the subprime market into the larger credit and capital markets. People were seeing an economy that was slowing and other issues within the economy that were becoming problematic. So passions have been running high.

GlobeSt.com: So we end ’07 with the status quo. Carried interest isn’t part of the alternative minimum tax bill. What’s on deck for ’08?

DeBoer: We have to step back and ask why the proposal came forward to begin with. It came forward for three reasons: One was the disparity between extremely wealthy people and what is increasingly a struggling middle class in America. It got policymakers’ attention. Second, there was the issue of an alternative minimum tax, something that could conceivably, if it hit middle-class taxpayers, make the first issue even worse. The third thing was the rules the Democratic Congress adopted when they took power in ’06. Under the Paygo rules, as they are called, Congress needs to find a way to pay for tax relief or spending increases.

Going into 2008, nothing has changed in terms of the income disparity. The AMT issue will come back and face policymakers next year as will other tax issues, and the Paygo rules will be back as well in the beginning of ’08. So when you ask if this issue will come back, yes it will, and it is incumbent upon the real estate industry and others concerned about it to continue to make the case that carried interest is not the right way to address the problems of disparity, the AMT and Paygo.

GlobeSt.com: It’s been said over the years that Congress seeks out real estate to bear the burden of relief in other areas. Is that the case here or is Congress just not focused on real estate?

DeBoer: I think both are at play. I don’t believe Congress, when they started down this road and started looking at the taxation of carried interest, had any idea of the impact of their proposal. But the industry does feel as if it was chosen to take an inordinate hit, and I think there is reason to feel that way. Nearly 50% of all partnerships in America are real estate partnerships, according to the latest IRS data. Substantially all of those have a carried-interest component to it.

So many in real estate feel this is an inordinate burden. That’s frankly why at the end of 2007 the rules have not changed. As the year wore on, we talked with members of Congress and walked them through real estate transactions. It all added up to members of Congress saying they’re not comfortable going forward with this proposal. But that doesn’t mean they won’t get comfortable next year or the year after that.

GlobeSt.com: So . . .

DeBoer: So the industry needs to continue the education effort and to point out the value of real estate to the overall economy–the number of jobs it creates along with the benefit to local tax budgets and so on. At the heart of this debate is the whole question of the taxation of capital gains. As we move closer to 2009 and 2010, the overall taxation of capital gains itself will be front and center, and some of the focus on carried interest will migrate over to that debate. That’s at the heart of this entire thing.

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