Carried Interest Tax Increase Proposals Making Their Way Through the Legislature

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The House recently approved a measure that would increase the tax on certain “compensation” paid to investment managers, known as carried interest, but the Senate has scaled back some of the tax hikes.

Generally speaking, carried interest is compensation paid to investment managers, not in cash, but in the form of an investment in the asset they are managing, like a mutual fund, or real estate investment partnership.  They are generally taxed as an investment asset, and can be afforded long-term capital gain treatment when sold, and taxed at 15%, as apposed to the ordinary income tax rates on compensation, which can be as high as 35%.

Although seemingly intended to target large Wall Street investment firms, carried interest legislation will have a major impact on a significant number of Nienow & Company, LLP clients – real estate investment partnerships.  Often, organizers of real estate investment partnerships will identify investments and organize investors, and take their profits on the ultimate sale of the property.  These arrangements will most likely fall under the carried interest rules.

Legislation on this topic first caught our eye a few years ago when the government targeted Blackrock.  At the time, we followed the pending legislation in detail and communicated regularly with our clients on the topic, and we will do so again as this topic resurfaces in pending tax legislation.

Following are some detailed articles on the current pending legislation:

Webcpa.com

Washington Post

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