Carried Interest, QIP Bills Introduced in Congress

Posted on April 1, 2019

Lawmakers return to Washington, D.C., this week after spending time in their districts. Several measures have been introduced that are important to NAIOP and commercial real estate. The Carried Interest Fairness Act of 2019, introduced in the House by Rep. Bill Pascrell (D-NJ) and in the Senate by Sen. Tammy Baldwin (D-WI), aims to treat certain income currently taxed at the capital gains rate as ordinary income. This would be a major change, since the top capital gains rate is 20 percent and the highest rate on ordinary income is 37 percent.

Less than two years ago, Congress passed the Tax Cuts and Jobs Act of 2017 (TCJA), a law that NAIOP strongly supported. Lawmakers recognized that taxing carried interests at a lower rate than ordinary income provides the necessary incentive for entrepreneurs to undertake risks inherent in development. The provision was therefore kept in place in the new tax law, though a new three-year holding period was imposed. The three-year holding period was intended to ensure that “carried interests” were used primarily for longer-term capital assets.

NAIOP has opposed changes to the taxation of real estate carried interests, and is working with its real estate allies to educate lawmakers in both the House and Senate on the changes already made to carried interest taxation.

Another bill, one which aims to fix a drafting error in the TCJA, is set to be introduced in the House this week. The legislation mirrors S.803, a Senate measure proposed recently that would shorten the cost recovery period for Qualified Improvement Property (improvements made by building owners for tenants).

Because of a mistake in writing the TCJA, the QIP recovery period is set at 39 years, while lawmakers had intended to set the period at one year. Permanently shortening the depreciation period has bipartisan support from members of both houses of Congress. The House bill is co-sponsored by four Republican and four Democratic members. Fixing the QIP mistake is a top legislative priority for NAIOP.

Meanwhile, the House Ways and Means Committee will hold a hearing on Wednesday to discuss the 2017 Tax Cuts and Jobs Act.

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