WASHINGTON, DC–As part of the mark-up for the “Tax Cuts and Jobs Act” introduced in the House of Representatives last week, House Ways and Means Chairman Kevin Brady plans to attach a three-year holding period to carried interest. He first announced his intention on CNBC Monday morning, saying it is to “make sure it's really focused on those long-term, traditional real estate partnerships.”
The current hold period is one year.
This measure is meant to address the critics that claim that people in the hedge fund and other industries flip investments quickly. The longer-term holds, the theory goes, are those that create the most jobs.
This is how a longer hold period would work hypothetically: Let's say four people buy a building for $1 million with each kicking in $25,000. But one person is taking the risk of signing on the loans, assuming litigation risk etc. In return the other partners agree that upon the sale of the building the other partners will give up some of their allocated gain and give it to the person taking the risk. That person will get 30% of the gain and the others take 23% instead of the 25% that they normally would have.
The extra 5% is the carried interest. Now under Brady's amendment, for that partner to get his extra 5% carried interest capital gain, the building will have to be held for three years and not one.
The proposal is a long way off from materializing. The amendment will have to make it into the final bill and that bill must pass the House of Representatives. The Senate, meanwhile, will be introducing its own measure this week.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
