MBA, Trade Groups Urge House to Reject Carried Interest Bill

The Mortgage Bankers Association and more than a dozen industry trade groups sent a joint letter to Capitol Hill urging that House to reject legislation that would end capital gains treatment of carried interest.

Under H.R. 1735 (, introduced by Rep. Bill Pascrell, D-N.J., and its companion Senate bill, S. 781, introduced by Sen. Tammy Baldwin, D-Wis., carried interest would be treated as wages taxed at ordinary income rates and also be subject to employment taxes.

In the letter (, the trade groups called H.R. 1735 “misguided legislation” that would result in a huge tax increase on countless Americans who use partnerships in businesses of all types and sizes.

“It would discourage individuals from pursuing their business vision, encourage debt rather than equity financing, tax sweat equity invested in businesses and slow economic growth,” the letter said. “These results would be particularly harmful to the nearly eight million partners in U.S. real estate partnerships.”

The letter strongly rejects the “false narrative” surrounding the carried interest issue in that it targets only a handful of hedge fund billionaires and Wall Street executives.

“The carried interest legislation is far broader and would apply to real estate partnerships of all sizes–from two friends owning and leasing a townhome to a large private real estate fund with institutional investors,” the letter said.

The letter noted much of the real estate investment that takes place today uses the partnership choice of entity–according to the IRS, real estate partnerships represent nearly 50 percent of the 3.7 million partnerships in the United States that owned $5.9 trillion in assets, earned more than $90 billion in net income and recognized nearly $50 billion in long-term capital gain in 2015.

“Most partnerships, in all businesses, reward the general partner with a share of the ultimate capital gain that reflects the risk they have taken–equity capital, assumption of business risk, or through good old-fashioned sweat equity. Reward for these latter forms of risk is ‘carried interest,'” the letter said.

H.R. 1735, the trade groups pointed out, would limit capital gain treatment only to taxpayers who have cash to invest. Those who invest entrepreneurial innovation, risk taking, and sweat equity would no longer receive capital gain treatment. The letter said taxing carried interest at ordinary income rates would discourage risk-taking that drives job creation and economic growth and reduce economic mobility by increasing the tax burden on cash-poor entrepreneurs who want to retain an ownership interest in their business.

“Perversely, it would encourage real estate owners to borrow more money to avoid taking on equity partners,” the letter said. “Moreover, the legislation would apply retroactively to partnership agreements executed years–often decades–earlier. These negotiated agreements between the partners were based on well-established tax law as it existed at the time. By changing the tax results years later, H.R. 1735 undermines the predictability of the tax system and discourages the long-term, patient investment that moves our economy forward.”

The letter warned that should the bill pass, it would make it more expensive to build or improve real estate and infrastructure, including workforce housing, assisted living communities and industrial properties. “Some development simply won’t happen, especially in long-neglected neighborhoods or on land with potential environmental contamination.”

Joining MBA in the letter: The Real Estate Roundtable; American Hotel & Lodging Association; American Resort Development Association; American Seniors Housing Association; CCIM Institute; Institute of Real Estate Management; International Council of Shopping Centers; NAIOP, Commercial Real Estate Development Association; National Apartment Association; National Association of Home Builders; National Association of Realtors; National Multifamily Housing Council; and the Realtors Land Institute.