Legislative Update: Inflation Reduction Act

Carried interest provision would create new implications for real estate partnerships

Senator Sinema, the last holdout that was preventing the passage of “Inflation Reduction Act” in the Senate, announced her support for the bill Thursday night. However, she leveraged her position as the key vote to get the carried interest tax hike provision removed from the bill.

The provision was aimed at increasing tax on private equity and hedge fund investments, but would have also required real estate partnerships to hold their real property investments for at least three years before reaping gains at the long-term capital gains rate. Currently, real estate partnerships are afforded an exemption governed by IRC Sec. §1231 that allows them to capture the benefits of long-term capital gains treatment upon the sale of real property after one year.

Lengthening the required hold time for real estate partnerships to capture the long-term capital gains rate on real property investments would have hindered the development of new housing at a time when the country is in desperate need of more homes and apartments. According to a recently published study by the NMHC and NAA, the nation needs to build an additional 4.3 million more apartments by 2035 to meet the demand for rental housing.