By now, most real estate professionals are aware that proposed legislation to limit the favorable tax treatment of “carried interests” does not affect only hedge fund managers. However, many do not realize the surprising (and sometimes shocking) breadth of arrangements involving investment in real estate that appear to be covered. While the legislation’s progress may have stalled, most prognosticators predict that, in part because the legislation has been deemed to be a revenue raiser, some form of the legislation eventually will be enacted with an effective date of Jan. 1, 2011. It is true that these may be the same people who told us that it was inconceivable that Congress would allow the estate tax to lapse for 2010. Still, given the plentiful opportunities for effective tax planning which now are available, but which would have to be carried out prior to the legislation’s effective date, potentially affected real estate professionals must consider whether they can afford the possible cost of doing nothing.
Background
The term “carried interest” refers to the share of partnership profits that partners receive other than in exchange for contributed capital. This term is often used to describe a share of the profits of a hedge fund or private equity fund which the fund manager receives as compensation for his services. However, a structurally similar arrangement is that of a real estate professional who receives a share of the profits of a partnership that owns real estate in exchange for his management services.
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