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Inside the New Tax Act's Changes to Carried Interest
To the surprise of many, the new tax policy included changes to the carried interest provision. Under the new policy, carried interest now has a three-year holding period. The policy has significant implications for commercial real estate investors, who will need to make immediate adjustments to comply with the new provision. Reporters from this newsletter's ALM sibling Globest.com sat down with Phil Jelsma, a partner and chair of the tax practice team at San Diego-based commercial real estate law firm Crosbie Gliner Schiffman Southard & Swanson LLP, to talk about the changes to carried interest, how this will impact commercial real estate investment and what investors should do now to comply.
Question: How has carried interest changed in the new tax policy?
A. Jelsma: Often referred to as profits interest or promote, carried interest is what is received for contributing services to a partnership, LLC fund or project. In real estate, it is often the interest received for taking the entrepreneurial risk of an enterprise. One of the most difficult — and unexpected — provisions of the Tax Cut and Jobs Act is the three-year holding period on “carried interests,” which has especially significant implications for those in the real estate industry. Capital gains allocable to a carried interest or profits interest in a partnership or LLC, which would otherwise be entitled to capital gains rights, will only be available if the partnership or LLC interest is held for more than three years. If held for less than three years, the capital gain will be subject to tax as short-term capital gain rather than long-term capital gain.
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