investingfromtheright

I am retired and take educated guesses on all things financial.

September 21, 2009

September 22, 2009: H.R 135, A Multi-Family Nightmare

Rep. Sander Levin (D-Mich) has introduced H.R. 1935 which will gut the carried interest tax treatment of multi-family housing. Carried interest is an interest in the capital gains of a partnership when it sells the property. Investing partners grant this interest to the general partners to recognize the value these partners bring to the venture as well as the risks such as recourse debt. litigation risks,responsibility for cost overruns, etc., posed by the venture. Carried interest has been an integral part of real estate partnerships for decades.

Currently, the carried interest income is taxed at capital gains tax rates - 15%. Under H.R. 1935, lawmakers seek to tax this as ordinary income, which may go as high as 39.6% by 2011. In addition to the draconian increase in the tax rate, reclassifying carried interest income from a capital gains to compensation would also subject that income to self-employment taxes.

It is estimated that 550,000 workers employed by the apartment industry as well as the 16 million apartment dwellers in the United States will be adversely affected by H.R. 1935.

Needless to say, the National Multi Housing Council and other like-minded groups are aggressively lobbying against carried interest taxation. They feel that the current tax treatment is appropriate as it represents a return on the underlying long term capital asset as risk and entrepreneurial activity.

An unintended consequence of H.R.1935 would be it's change upon the economics of apartment construction so significantly that many proposed multi family housing complexes would not be viable and thus cancelled, thus impacting in a negative way the nation's affordable housing shortage.

For information about the carried interest issue, go to:

www.nmhc.org/goto/CarriedInterest

J.B. Gray, vp of the NMHC in Washington, D.C. was a primary source for this post

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