Realtors take aim at private equity tax hike plan

Congressmen returning to their districts for recess should expect a visit from a familiar constituent opining on an unexpected topic: Home Realtors will be lashing out against a proposed tax hike on the private equity industry.

According to National Association of Realtors (NAR) spokeswoman Mary Trupo, the Realtors’ message will be: “We want you to know that the Realtors do not like it. We are not in favor of the bill as it is proposed.”

{mosads}The issue has made the short list of concerns on which the NAR field network will focus in the coming weeks, ranking among such perennial industry bugbears as banks encroaching on Realtors’ turf and the cost of healthcare for small-business owners.

The involvement of the NAR, a lobbying powerhouse that routinely derails legislative threats to the home mortgage interest deduction, is a boon to the private equity industry as it fights off the tax hike, proposed in June by House Ways and Means Committee Chairman Charles Rangel (D-N.Y.) and Rep. Sandy Levin (D-Mich.). Yet at first blush, the group seems to have pounced on an issue far afield from the realty business.

The Rangel-Levin bill would raise taxes on the “carried interest” used to compensate investment managers from capital gains rates of 15 percent to ordinary income rates as high as 35 percent. Many perceive the legislation as a threat only to Wall Street high-rollers, but the bill would raise taxes on managers of any investment partnership holding securities, commodities or real estate as an asset.

 Nearly all the commercial real estate in the U.S., valued at more than $1 trillion, is owned by partnerships, and carried interest is a common feature of those partnerships, according to the NAR’s tax specialist, Linda Goold.

The tax change would dampen investment in the shopping centers, office buildings, golf courses and hotels that make it easier for Realtors to sell homes, Goold argued: “Communities need infusions of capital for Main Street in order to support their residential markets.”

The real estate industry has been lobbying lawmakers to oppose a change in the tax treatment of carried interest since the Senate Finance Committee began probing the issue earlier this year. “The fact of the matter is that real estate is more broadly affected. It is a major stakeholder in this issue,” Steve Renna, senior vice president and counsel to the Real Estate Roundtable, said.

Recently, 17 trade groups representing all facets of the real estate industry, from general contractors to retail developers to building managers, denounced the tax proposal in a letter sent to lawmakers.

In the second of two Senate Finance Committee hearings on Tuesday, the incoming chairman of the International Council of Shopping Centers, Adam Ifshin, argued that changing the tax treatment of carried interest would be “the most sweeping and potentially most destructive tax increase on real estate” since the 1986 tax reform, which caused a major downtown in the industry.

Rep. Eric Cantor (Va.), the Republican leadership member who is leading the charge against the tax change in the House, repeatedly has cited the legislation’s impact on real estate. “This is the wrong direction to go in if you want to continue to promote intercity development, create affordable housing and create jobs,” he said.

Levin pointed out the irony of Realtors siding with opponents of the tax change. “Realtors provide services. There is very considerable risk in what they do. They can go months without selling anything,” he explained. “And when they pay taxes, they pay at ordinary income rates.”  

The NAR’s involvement is a boon to those opposing the tax change because Realtors are “by nature proactive, aggressive people,” one lobbyist familiar with the issue said. “Private equity, they need to fight behind the scenes, donate a lot of money and hold backroom meetings that no one knows about. And publicly, they need this to happen: the Realtors jumping in with both feet.”

The Realtors hold sway with lawmakers because “they are the eyes and ears of the communities,” Trupo said. “They build the communities that the lawmakers oversee.”

Still, the issue poses an educational challenge for the NAR, whose 1.3 million members, like most Americans, largely have never heard of carried interest. The group has distributed talking points and backgrounders on the issue and set up meetings with select members involved in political outreach over the August break.

The key to driving home the importance of the issue is emphasizing its relation to the capital gains rate, Goold argued, something that Realtors see as hugely influential to their livelihoods. “If you’re involved in real estate today, you might not know anything about carried interest, but you know that anything involving capital gains — you know that matters,” she said.