Carried Interest

John Kuhl and Owen Gross wrote an article published in the March 2013 issue of The Institutional Real Estate Letter – North America about carried interest and ongoing efforts to tax it at ordinary income rates. According to the authors, carried interest is “share of profits from a partnership (or other entity that is taxed as a partnership) that is distributed to the partner … of the partnership that is greater than the manager's pro rata share of the capital contributed to the partnership.”

In their article, Kuhl and Gross wrote that the Internal Revenue Service does not currently have rules specifying the tax treatment of carried interest but that the situation could change thanks to years of budget deficits. On four different occasions the House of Representatives has attempted to pass legislation to tax carried interest at ordinary income rates but so far the Senate has not followed suit.

“Still, at the writing of this article, the onset of sequestration (that is, across-the-board spending cuts) had only been extended until February,” Kuhl and Gross wrote. “As both spending cuts and increased revenues will be required to reduce the continuing deficit, it is very likely that we have not heard the last of the calls for all carried interest to be taxed at ordinary income rates.”