Article
Continued tax planning opportunities for real estate professionals
March 26, 2023 · Authored by Jim Dubeck
President Joe Biden signed the Inflation Reduction Act of 2022 on Aug. 16, 2022. The enacted version of the Inflation Reduction Act didn’t contain the proposed expanded provisions of the Internal Revenue Code (IRC) Section 1061 related to carried interest. However, it’s a reminder that change is always present and complacency in tax planning can yield unpleasant results for real estate owners and investors.
The carried interest rules of IRC Section 1061 can recharacterize long-term capital gains as short-term capital gains. If the carried interest rules apply, a 36-month holding period applies, rather than the typical 12-month holding period.
The provisions of carried interest under IRC Section 1061 remain unchanged by the Inflation Reduction Act, but the originally proposed modifications are important to note for possible future legislative packages and shifting industry trends.
Below is a high-level summary of the proposed changes in the initial draft of the Inflation Reduction Act that were removed prior to the finalization of the bill.
- Five-year holding period instead of three-year holding period for gains subject to the carried interest rules
- A delay in the measurement of when the holding period begins
- Expansion of income types subject to carried interest rules to include IRC Section 1231 gains and losses and real estate investment trust (REIT) capital gains
- Acceleration of gains on transfers of partnership interest
Key planning opportunities
While the changes described above didn’t occur, the continuing focus on the carried interest rules should be monitored. In addition to carried interest uncertainty, the following are tax planning areas real estate professionals should continually monitor given the economic and legislative environment.
Fee waivers and property transfers
Fee waivers have historically been used by fund sponsors and managers subject to IRC Section 1061 rules to provide an income deferral for carried interest treatment on assets with a holding period of less than three years.
Many fund managers and associated personnel hold a partnership interest entitling them to a carry,
Related sections
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.