Real Estate Forum - January 2008

Carried Interest Issue Will Resurface

The industry dodged a bullet in the past several weeks as the long-feared carried interest tax-hike proposal was dropped from the alternative minimum tax bill. Washington, DC-based Real Estate Roundtable labels carried interest “onerous” and explains that it would raise “the tax rate on general partners’ carried interest by about 150%.”

But don’t lay down your weapons just yet. Jeffrey D. DeBoer, RER’s president and CEO, fully expects the measure to resurface again in 2008. So-called “Paygo” rules will breathe new life into the tax proposal—a good thing for the feds as they root around for ways to subsidize cuts elsewhere in the budget. It’s a decidedly

_D_E_BOERbad thing, however, for the industry.

In an interview with John Salustri, executive editor of Real Estate Media’s online products

including GlobeSt.com, where this first appeared, DeBoer surveys the political landscape and tells us what he sees on the horizon.

SO WE END ’07 WITH THE STATUS QUO. CARRIED INTEREST ISN’T PART OF THE ALTERNATIVE MINIMUM TAX BILL. WHAT’S ON DECK FOR ’08? We have to step back and ask why the proposal came forward to begin with. It came forward for three reasons. One was the disparity between extremely wealthy people and what is increasingly a struggling middle class in America. It got policymakers’ attention. Second, there was the issue of an alternative minimum tax, something that

could conceivably, if it hit middle-class taxpayers, make the first issue even worse. The third thing was the rules the Democratic Congress adopted when it took power in ’06. Under the Paygo rules, Congress needs to find a way to pay for tax relief or spending increases.

Nothing has changed in terms of the income disparity. The AMT issue will come back and face policymakers next year, as will other tax issues, and the Paygo rules will be back as well this year. It is incumbent upon the real estate industry and others concerned about it to continue to make the case that carried interest is not the right way to address the problems of disparity, the AMT and Paygo.

IT’S BEEN SAID THAT CONGRESS SEEKS OUT REAL ESTATE TO BEAR THE BURDEN OF RELIEF IN OTHER AREAS. IS THAT THE CASE HERE?

The industry does feel as if it was chosen to take an inordinate hit, and there is reason to feel that way. Nearly 50% of all partnerships in America are real estate partnerships, according to the latest IRS data. Substantially all of those have a carried-interest component to it.

So many in real estate feel this is an inordinate burden. That’s frankly why the rules have not changed. The industry needs to continue the education effort and to point out the value of real estate to the overall economy—the number of jobs it creates along with the benefit to local tax budgets and so on. At the heart of this debate is the whole question of the taxation of capital gains. As we move closer to 2009 and 2010, the overall taxation of capital gains itself will be front and center, and some of the focus on carried interest will migrate over to that debate.

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