Rep. Bill Pascrell (D-N.J.), along with Reps. Andy Levin (D-Mich.) and Katie Porter (D-Calf.), this week introduced H.R. 1068, the Carried Interest Fairness Act of 2021. The bill would impose a major tax increase on real estate by generally requiring carried interest to be classified as ordinary income rather than a capital gain. Rep. Pascrell has introduced similar legislation in the past.
A carried (or promoted) interest is a profits interest in a business deal that is larger as a share of the total return than the share of the initial equity investment. Under present law, if the income paid out as the carry is a capital gain, then the carry is taxed at capital gains tax rates (in general, up to 23.8%). In 2017, the Tax Cuts and Jobs Act increased the holding period required to qualify for long-term capital gains treatment as a carried interest from one to three years.
NAHB opposes changes to the taxation of carried interest because it would have a significant negative impact on the multifamily housing industry and on the bottom lines of companies that participate in real estate investment partnerships. Despite the focus on the financial sector, the use of carried interest is common in real estate.
NAHB expects not only carried interest but capital gains tax rates to come under additional scrutiny under the Democratic-controlled Congress. President Biden has called for increasing the long-term capital gains and qualified dividend rate for taxpayers with income in excess of $1 million to the ordinary income tax rate — a rate he also called to be increased from its current 37% to 39.6%.