Two Senators File Bill to Kill Carried Interest

Two senators filed a bill today titled “Ending the Carried Interest Loophole Act.” Senate Finance Committee Chairman Ron Wyden (D-Ore.) and committee member Sheldon Whitehouse (D-RI) filed legislation that, if passed, would repeal the carried interest tax loop.

Carried interest is a share of a private equity or fund’s profits that serve as compensation for fund managers and is taxed at favorable rates. Although private equity and hedge fund operators are typically mentioned as the target of the tax changes, real estate fund managers and developers are also sectors that benefit from the treatment.

It is an understatement to say it is an important tax break for the industry. 

“If the tax break is repealed, it will mean higher costs, which will mean higher rents, which will mean surging inflation,” Julio González, CEO of Engineered Tax Services, tells GlobeSt.com. 

“That potentially is a bigger impact than what we saw with Covid and evictions and moratoriums,” says Ernie Katai, executive vice president and head of production at commercial mortgage servicer Berkadia. “A lot of clients haven’t focused on that, but I find my clients that are former tax attorneys or CPAs are paying more attention to that and that we would feel a bigger impact.”

“A significant number of investors will decide to adjust their risk and park their money in different investment vehicles that have more liquidity such as the stock market or cryptocurrency since they’ll have to pay the same taxes anyway,” Gregory Freedman, co-CEO of New York and Florida-based real estate investment and development firm BH3, tells GlobeSt.com.

Then again, stocks and cryptocurrencies have high valuations, and potential volatility in prices, which could mean less advantage.

In addition, these initial reactions may be extreme compared to what likely would happen. “Everybody jockeys for position before a change in tax code,” Katai says. “When it happens, we have the time period where we all digest. It slows things down for a while. Everybody goes to work so see if there’s a better product to figure it out. Once everybody’s used to the new normal, it kind of kicks back into gear.”

It’s not the first time this year that Democrats have taken aim at the tax provision. President Biden indicated in April that he wanted to end carried interest along with some other tax provisions that favored real estate. Democrats also filed the Carried Interest Fairness Act in May 2021. But with the current balance in Congress, particularly in the Senate with the filibuster, this might be difficult to pass as a standalone bill. However, anything using reconciliation, like the potential infrastructure bill, could see a provision included, where a simple majority in the Senate could pass it.