Carried Interest Bill – Impact on Real Estate Partnerships

By Stephen M. Breitstone

Fighting abuse is on the minds of lawmakers. Compensation structures in the financial sector have come under increasing scrutiny. There has been a public perception that many mainstream compensation structures are abusive. In some instances this perception is based on reality. However, coupled with an overwhelming need to raise revenues, the response can lead to the unintended consequences of legislative caprice and economic carnage, as exemplified by recently proposed carried interest legislation.

Proposed section 710 would in one broad stroke dramatically worsen the tax treatment of most forms of investment partnerships. Although this legislation originally targeted specific compensation structures employed in hedge funds and private equity funds, the current proposals would apply equally to traditional real estate investment partnerships. If enacted as currently drafted, it could seriously impede real estate investment and development activity that is essential to long-term growth and capital formation in our economy. It may also disrupt many existing arrangements and thus have a significant retroactive impact…

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