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Tax Hike on ‘Carried Interest’ Would Disrupt Real Estate
While legislation approved by the House on Nov. 9 would provide temporary relief from the Alternative Minimum Tax, contains mortgage debt forgiveness provisions and extends dozens of expiring tax provisions, NAHB opposes the measure because a plan to tax "carried interest" to pay for the bill would impose a multi-billion dollar tax increase on real estate at a time when the industry is already experiencing a downswing.
“The nation’s home builders share the goals embodied in H.R. 3996 to halt the reach of the AMT for another year and help struggling American families keep their homes,” said NAHB President Brian Catalde. “However, the carried interest proposal to offset the cost of this relief is the most significant and potentially most disruptive tax on real estate since the 1986 Tax Reform Act and would result in higher prices for multifamily housing, less job creation and lower community development, especially in underserved areas.”
This is the message that NAHB sent to lawmakers in a letter before they voted on the bill. The potential impact of the carried interest provision on real estate development is of such concern to the home building industry that NAHB designated a "no" vote on passage of H.R. 3996, the Temporary Tax Relief Act of 2007, as a key vote.
In addition, NAHB joined more than a dozen like-minded industry groups in signing a letter voicing strong opposition to the bill.
The legislation, which narrowly passed the House by a vote of 216 to 193, would tax the return on all carried interest allocable to a partnership as ordinary income rather than capital gains. Because this includes the carried interest held by general partners in real estate investment partnerships, the legislation would have a significant negative impact on the multifamily housing industry and on the bottom lines of companies that use these partnerships.
Under present law, capital gains income generated by carried interest in a partnership is subject to a tax rate of 15%. If the House bill were to be enacted into law, such carried interest would be characterized as ordinary income subject to tax rates up to 35%.
This massive tax increase on real estate would disrupt the investment relationship between developers and investors, said Catalde.
“First, this would make borderline development transactions, such as those in underserved communities that typically carry higher risks, significantly less attractive,” he said. “Second, treatment of carried interest would affect the pricing of development transactions which, in turn, would have negative implications for capital flowing into real estate development.”
The bottom line, Catalde said, is that a tax increase on real estate entrepreneurs across the country of more than 133% would have a pervasively damaging impact on jobs, economic growth and the tax base.
Though the bill was approved by the House, it is unlikely to be enacted into law as written.
The carried interest provision faces long odds in the Senate, where Finance Committee Chairman Max Baucus (D-Mont.) and several other Democratic members of the committee have expressed discomfort with the carried interest proposal.
Further, the White House has threatened to veto the proposed patch of the AMT, which would prevent an additional 20 million Americans from being captured under the tax, because it objects to the tax increases in the carried interest and other provisions to offset the cost of the bill.
NAHB continues to urge Congress to enact swift passage of AMT relief and mortgage debt forgiveness legislation and to oppose the carried interest proposal because of its damaging impact on real estate development.
To view the bill, click here and type H.R. 3996 in the box in the upper center screen.
For more information, e-mail Greg Brown at NAHB, or call him at 800-368-5242 x8421.
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