A proposal that would have changed how carried interest is taxed was cut from a spending bill before it passed this weekend, giving real estate developers a sigh of relief. The $430 billion Inflation Reduction Act of 2022 was passed by the Senate on Sunday and seeks to tackle climate change, lower prescription drug costs and lower the deficit by around $300 billion. A provision in the bill would have nearly closed the carried interest tax loophole, which would have brought in a projected $14 billion in revenue. However, it was cut from the final draft of the bill after Arizona Senator Kyrsten Sinema intervened and Democrats agreed to remove it.
The share of profit that developers and fund managers receive from a project, often referred to as “promotes,” are treated as carried interest. The provision cut from the bill would have required fund managers to hold on to investments for 5 years instead of the current requirement of 3 years in order to qualify for the tax advantage. The National Multifamily Housing Council (NMHC), an advocacy group for the trillion-dollar multifamily industry, praised the decision to remove the provision, calling it a “victory” for the industry. NMHC had lobbied members of Congress not to get rid of the loophole, which it said would have had a “devastating impact” on housing production. “The carried interest provision would have been a disincentive to investment in real estate particularly in housing,” said Real Estate Roundtable CEO Jeff DeBoer.
Other provisions of the bill that could have an impact on commercial real estate include an increase to the corporate tax minimum. The bill sets a 15 percent corporate minimum tax rate on companies with more than $1 billion in revenue and imposes a 1 percent tax on stock buybacks by publicly traded companies. Lawmakers have long battled over the carried interest deduction. Former President Donald Trump promised to do away with carried interest during his 2016 campaign, and President Biden made a similar promise during his presidential campaign in 2020.
