The Tax Cuts and Jobs Act changed the landscape of the tax code and affected all taxpayers in some form or fashion. As we near the end of the first year of the implementation of Tax Cuts and Jobs Act, we are actively seeing how this has impacted taxpayers. One of the many impacts from the new tax laws are the changes to the carried interest rules. While these changes had significant implications to those in the hedge fund industry, it also affected those in the real estate profession.
A Historical View
Most real estate partnerships are made up of one or more partners that contribute their time and experience, while the remaining partners typically contribute capital. Under this structure, the partners that contributed the capital will receive an annual allocation of the profits of the partnership while it is in operation. Upon sale of the property, all partners receive an allocation of the capital gain generated. Typically, the partner(s) that contributed their time and experience hold their partnership interest in the form of a carried interest or profits interest. Historically, this has allowed those partners with carried interests to receive capital gain treatment upon sale so long as the partnership held the property longer than a year.
Applicable Partnership Interest
Under the new Tax Cuts and Jobs Act, the timeline for those holding carried interests has been extended a longer period in order to receive capital gain treatment. The Act imposed a new provision called “Applicable Partnership Interest,” which dictates how carried interests are to be treated. After December 31, 2017, a partner who has received a carried interest in the partnership must hold their interest for at least 3 years to receive the preferential capital gains treatment.
While most real estate partnership interests are held longer than 3 years, the new carried interest rules could have an impact if the partnership does sell the property within the 3-year period. There are additional tax planning opportunities to consider in order to provide the partners the best tax treatment when retaining their partnership interest through a carried interest.
The Tax Cuts and Jobs Act has impacted all taxpayers and can be cumbersome to navigate. ATKG is always here to help assist you through these rules and regulations to achieve the best outcome for your personal situation.
Keeping it real as always.
Diane White, CPA
Diane White is a Senior Manager at ATKG and is a Certified Public Accountant. She graduated Magna Cum Laude and obtained her bachelors and master’s degree in Accounting from The University of Texas at San Antonio. Diane can be reached at 210.733.6611 or via email at dwhite@atkgcpa.com.
