Rangel tax bill could roil real estate sector, warns group

Hoping to shield its members from a tax hike on fund managers’ carried interest income, the Real Estate Roundtable on Tuesday unveiled a study finding that the measure’s impact on real estate partnerships alone would cost the economy up to $20 billion annually.

The measure would harm the economy by draining talent away from the real estate sector, dampening investors’ appetite for riskier deals and encouraging inefficient economic activity as fund managers seek to dodge the tax hike, the study concluded.

{mosads}“We think it is the most significant and the most potentially destructive tax increase on real estate since 1986,” said the group’s president and chief executive, Jeffrey DeBoer. He was referring to tax changes enacted 21 years ago that the group says sparked a sharp downturn in the real estate sector.

As the House prepares to vote on the measure as soon as Thursday, the real estate group hopes the study will call attention to the impact on the real estate sector of a tax increase seen as targeting hedge fund and private equity managers.

Carried interest is used widely in the private equity and hedge fund industries to compensate investment managers, but it also applies to partnerships in the venture capital and real estate industries.

Lobbies for both have been pushing lawmakers to exclude their industries from the measure, which would tax fund managers’ carried interest at ordinary income rates as high as 35 percent. Currently, they enjoy the lower 15 percent capital gains rate on the bulk of their pay.

The House Ways and Means Committee approved the measure last week, attaching it as an offset to a $76 billion tax package, including a must-pass one-year patch to the Alternative Minimum Tax (AMT).

Ways and Means Chairman Rep. Charles Rangel (D-N.Y.) told reporters that House Speaker Nancy Pelosi (D-Calif.) gave a “roaring speech” in favor of the proposal at a Tuesday meeting of the Democratic Caucus. “She made it abundantly clear where she stood,” he said.

Rangel said he fielded a number of questions about the carried interest at the meeting from members who seemed inclined to support the tax increase. He said that one lawmaker asked about the measure’s impact on venture capitalists, adding that he told the audience to air their concerns: “If there are problems, I begged them to tell me now.”

The Real Estate Roundtable’s members include the top executives of companies that together hold a total of $700 billion in real estate assets. It hired Douglas Holtz-Eakin, the former director of the Congressional Budget Office, to conduct the study.  

The study found that real estate partnerships account for 45 percent of all investment partnerships filing to the IRS. There are 6. 6 million such real estate partnerships, which hold roughly $1.3 trillion in assets, about a quarter of the value of all commercial real estate in the U.S.

In a conference call with reporters, Holtz-Eakin argued that raising taxes on the industry would have a 15 to 20 percent hit on real estate fund managers’ income. That, in turn, would threaten real estate projects in marginal neighborhoods, reducing the choice in housing and shopping for residents. He said the tax increase would also hurt the construction industry.

“I don’t think people have recognized the pervasive impact of this policy,” Holtz-Eakin said.

The appetite for shielding the real estate or venture capital industries remains unclear. Despite a few remarks from Ways and Means Democrats about the real estate industry during the drafting session, none offered an amendment to limit the measure’s impact. Rep. Kevin Brady (R-Texas) offered an amendment to exempt real estate assets from the tax increase, but it failed along a 13-23 party-line vote.

Asked whether the real estate group would support the tax increase if the industry obtained a carve-out, DeBoer said, “That’s very speculative. I don’t want to say one way or another. We’re simply trying to point out why this is a bad thing for real estate.”

Jonathan E. Kaplan contributed to this report.