NAA strongly opposes any change to the tax treatment of a real estate partnership carried interest (often known as the "promote"). Current law granting capital gains treatment to the carried interest granted by investing partners to the general partners is the proper tax treatment because it recognizes the risk the general partner takes and the value he or she brings to the venture as well as the long-term nature of real estate investing.

Background
Last year, Congressional leaders attempted to rein in the high-flying hedge fund managers by proposing to eliminate capi-tal gains treatment of carried interest (H.R. 2834 and H.R. 3996) and instead taxing it as regular income. This would amount to a 133 percent tax increase. (A carried interest is a particular type of an interest in the capital gain of the part-nership when it sells its property that is typically granted to the general partner by the limited partners.) The proposed change in the taxation of carried interest would impose the most sweeping and potentially most disruptive new tax on real estate since the Tax Reform Act of 1986, which contained the passive loss limitation rules.

Although the original focus of this tax change was the Wall Street hedge funds, the version of the legislation passed by the House would have affected a number of industries, including real estate. Some estimates indicated that approximate-ly one-third of the legislation's impact would have been on the real estate industry alone.

Current tax law, which treats carried interest as a capital gain, is the proper treatment of this income because carried in-terest represents a return on risk and entrepreneurial activity. Extending ordinary income treatment to this revenue is in-appropriate. Additionally, any fees that a general partner receives that represents payment for operations and manage-ment activities are already properly taxed as ordinary income.

Not only is such a tax law change inappropriate, it also will have numerous unintended consequences, including exacer-bating the nation's affordable housing shortage. If enacted, changes in the taxation of carried interests could affect whether a new development is financially viable. It will be particularly damaging to properties located in under-developed areas and could prevent much of the proposed new affordable housing from being built.

Finally, some in Congress see the tax revenue generated by the carried interest proposal as a way to offset the cost of other tax changes, such as changes in the alternative minimum tax. Enacting a bad tax policy, such as carried interest, merely to gain revenue to make other tax changes, is not an appropriate view of tax policy, which demands that each tax proposal be judged on its individual merits.

Current Status
Led by Ways and Means Chairman Charles Rangel (D-NY), a form of the carried interest tax change was included in the version of the Temporary Tax Relief Act of 2007 (H.R. 3996) that passed the House of Representatives on November 9, 2007. Largely due to opposition by the Administration and Senate Republicans to various tax increases, including carried interest, contained in the House bill, the final version of the bill did not contain the carried interest proposal.

Congressman Sander Levin (D-MI) has introduced a bill (H.R. 2834) proposing changing the taxation of partnership car-ried interests from capital gains to ordinary income.