The American Jobs and Closing Tax Loopholes Act appeared to be dealt a defeat in the U.S. Senate last night when an altered version of the bill failed to pass for a third time.
The legislation, which was estimated to cost $141 billion, included plans to extend benefits and healthcare coverage for unemployed workers, but had drawn controversy for containing provisions to pay for those extensions by raising taxes that would likely have affected a wide swatch of investment partnerships.
The bill’s tax hike appeared aimed at hedge funds, private equity firms and other financial companies that earn profits by taking a cut of the returns generated by the investments they manage, what is called carried interest. But real estate experts said that the bill would have affected many real estate partnerships too because they are structured similarly.
Under the proposed law, carried interest, which is currently taxed at the capital gains rate of 15 percent, would be treated instead as regular income and taxed at nearly 40 percent.
Worse, in recent weeks it became clearer that in the fine print of the bill were potentially sweeping changes that would assess a wider swath of partnerships and more of their activities at the income tax rate. There were concerns that family partnerships could have been included under the legislation because of ambiguous language in the bill that appeared to give a broader definition of who could be treated as an investment manager and therefore surveyed at the higher rate instead of paying capital gains.
The bill would have forced those who did earn carried interest to also pay higher taxes when they sold their share in the investment or when the partnership was liquidated.
The legislation alarmed the real estate community because it was seen to impact the typical types of partnerships that are set up to invest in real estate assets.
According to Steve Spinola, president of the real estate association and lobbying group REBNY, the bill was roundly panned by the real estate industry and began to draw the ire of powerful members who had initially appeared exempt but became concerned by the bill’s seemingly wide reach. William Rudin, patriarch of the family owned real estate firm, Rudin Management Company, was active in efforts by the Real Estate Roundtable, a real estate lobbying group in Washington, D.C., to help defeat the bill and spread awareness among real estate members that the tax hike could affect more than just managers who earn carried interest.
Spinola said that other prominent real estate families joined in the push against the bill in recent weeks such as the Durst and the Lefrak families.
“Everyone was reaching out to senators or political figures they knew,” Spinola said.
The bill, which was being put forward by Nevada Democratic senator Harry Reid, appeared to die last night when, for the third time in recent weeks, it failed to achieve majority support. Even some Democrats haven’t supported the bill, including Nebraska Senator Ben Nelson, who, according to written reports, said that he would vote for it only if a provision was attached exempting real estate partnerships from the carried interest tax hike.