As I’ve commented previously, Congress has been contemplating imposing a stiff tax increase on the "carried interest" or a developer’s "promote" in real estate deals; and a long, long list of commercial real estate industry organizations have been fighting to stop the tax increase.
This tax would be a real hardship on commercial real estate, and consequently would result in even more tough times for lenders. (And of course, Congress is looking for ways to raise money in order to combat the deficit.)
Here’s some good news in troubled times for commercial real estate: the tax increase on carried interest is dead (for the immediate future).
Recall that the House passed its version of the tax increase (H.R. 4123; The American Jobs and Closing Tax Loopholes Act ) in late May. Here is the summary of the House bill by the Mortgage Bankers Association:
"Under the House-passed bill, 50 percent of any carried interest that does not reflect a return on investment capital would be taxed at the significantly higher income tax rate (up to 35 percent), instead of as long-term capital gains, which are taxed at 15 percent. In 2013, the portion of carried interest taxed at the higher rate would climb to 75 percent. The Joint Economic Committee has found that this provision would raise taxes by $18.7 billion over the next 10 years."
Distressed borrowers and lenders alike now can sigh a (small) sigh of relief . . . because on last Thursday (June 24), the Senate failed for a third time (it was try, try and try again) to persuade 60 Senators to support the bill. Here is the summary and announcement from the National Multi Housing Council:
". . . Senator Max Baucus (D-MT) twice modified the carried interest proposal to try to make it more palatable to real estate partnerships.
The latest iteration would have taxed 75% of a carried interest at ordinary income rates and 25% at capital gains rates as of 2011. A carried interest attributable to assets held for at least five years would have been taxed at a 50-50 split. The language was also modified to exempt family partnerships who allocate carried interests on a pro-rata basis from the tax law change. Those partnerships would have continued to be taxed at capital gains levels.
While the most immediate threat appears to have passed, NAA/NMHC remain vigilant as the Senate could take up the extenders bill again in the fall, and carried interest remains a possible "pay for" for other forthcoming legislation."
I know that this is this is the "tough times" blog, where things are always suppose to be dark and . . . hopeless – or at least coated in a thick layer of winter gray. But, this is good news . . . .
It is nice to have some good news.
And kudos to Steve Church of JLL for bringing this "news" to my attention.
If you have any comments or other perspectives on this, please post a comment.