Tax Realty Consultant

While legislation approved by the House would provide temporary relief from the Alternative Minimum Tax (AMT) and contains mortgage debt forgiveness provisions, the National Association of Home Builders (NAHB) opposes the measure because a plan to tax “carried interest” to pay for the bill would impose a multi-billion dollar tax increase on real estate at a time when the industry is already experiencing a downswing.

“NAHB shares the goals embodied in H.R. 3996 to halt the reach of the AMT for another year and help struggling American families keep their homes,” said NAHB President Brian Catalde, a home builder from El Segundo, Calif. “However, the carried interest proposal to offset the cost of this relief is the most significant and potentially most disruptive tax on real estate since the 1986 Tax Reform Act and would result in higher prices for multifamily housing, less job creation and lower community development, especially in underserved areas.”

HR. 3996, the Temporary Tax Relief Act of 2007, would tax the return on all carried interests allocable to a partnership as ordinary income rather than capital gains. Because this includes the carried interest held by general partners in real estate investment partnerships, the legislation would have a significant negative impact on the multifamily housing industry and on the bottom lines of companies that use these partnerships.

Under present law, capital gain income generated by carried interest in a partnership is subject to a tax rate of 15 percent. If the House bill were to be enacted into law, such carried interest would be characterized as ordinary income subject to tax rates up to 35 percent.

This massive tax increase on real estate would disrupt the investment relationship between developers and investors, said Catalde.

“First, this would make borderline development transactions, such as those in underserved communities that typically carry higher risks, significantly less attractive,” he said. “Second, treatment of carried interest would affect the pricing of development transactions which, in turn, would have negative implications for capital flowing into real estate development.”

The bottom line, Catalde said, is that a tax increase on real estate entrepreneurs across the country of more than 133 percent would have a pervasively damaging impact on jobs, economic growth and the tax base

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