Treasury Department Finalizes Carried Interest Rules

The Treasury Department is completing several multi-year tax regulatory projects that primarily relate to the Tax Cuts and Jobs Act of 2017 before the new Biden Administration. 

Chief among them are procedures for carried interest and the deductibility of business interest, which the IRS just finalized. 

Much of the new rules were already established and are familiar to the industry.  The Tax Cuts and Jobs Act established a three-year holding period for a carried interest to be treated as a long-term capital gain, while proposed carried interest regulations released last year excluded Section 1231 gains from the extended period. Section 1231 applies to real property used in a trade or business that is held for more than one year and is not held by a taxpayer primarily for sale to customers and this exception made it into the final rules. 

This was a palatable compromise for the commercial real estate industry. As the National Multifamily Housing Council noted, it has long advocated that carried interest should be treated as a long-term capital gain if the underlying asset is held for at least one year. “The industry strongly opposed extending the holding period to three years as part of TCJA but is pleased the law does not lengthen the one-year holding period applicable to Section 1231 gains,” it said. 

In its analysis of the final measure, the Real Estate Roundtable notes the rules also clarify that the three-year holding period does not override other tax code provisions that treat certain transactions as nontaxable events.

Greater Finance Flexibility 

The roundtable also points out that the financial regulations provide greater flexibility for a general partner to finance an equity interest in a partnership with a loan from other partners in the partnership. 

This is relevant in cases where a general partner will borrow funds to contribute to a partnership. It had originally been proposed that a capital account did not include the contribution of funds attributable to a loan from another partner, the partnership or a related person until loan amounts were repaid, NMHC said. 

But the final regulations allow these contributions to count toward an individual service provider’s capital account balance as long as the individual service provider is personally liable for the loan, it said. “The circumstances for when a service provider is responsible for the loan include the loan being fully recourse to the service provider, the service provider having no right to reimbursement from another person and the loan not being guaranteed by another individual.”

Senior Housing Qualifies for Exception 

The IRS also created a safe harbor for senior housing to qualify for an exception available to a “real property trade or business,” the Real Estate Roundtable explained.

Uncertainty about whether an assisted living facility would qualify as a real property trade or business has hung over the senior housing industry since the legislation’s enactment, the roundtable said. This new revenue procedure now clarifies that senior housing qualifies for the exception, as long as specific requirements are met.