Navigating Potential Changes to Carried Interest Tax Breaks

As the new administration in Washington zeroes in on budget and tax reforms, the carried interest tax break is once again under the microscope. This long-standing tax benefit, traditionally relied on as a compensation tool for private equity managers, has allowed commercial real estate firms to reward deal sponsors and managers with “profits interests” in transactions that are taxed at lower capital gains tax rates rather than higher ordinary income rates. Despite past efforts to eliminate it, such as the 2017 attempt by the Trump administration, robust lobbying by private equity firms and congressional pushback have kept the tax break intact. However, current signals from the administration suggest that its elimination could be on the horizon, posing significant financial implications for commercial real estate firms that rely on carried interest as a key component of compensation.

Real estate firms might consider several strategies to offset and minimize the financial implications of the potential removal of this tax break. These include boosting management fees, encouraging equity co-investment, and increasing performance bonuses. Additionally, exploring “true” joint ventures, utilizing equity interest options, and leveraging tax-advantaged opportunities can align interests and maintain profitability. While the prospect of this change presents challenges, it also offers real estate firms an opportunity to rethink compensation structures and innovate strategically. By staying informed and proactive, firms can mitigate the impact of these changes and potentially uncover new avenues for growth and investment.

For a deeper dive into these strategies and their implications, click here to read the full article in Globe St.