carried interest rule as applied to real estate development

[DCinvestor]

Who's familiar with carried interest tax rules for real estate development fund (gp and limited partner structure, limited partner supplies most capital, gp receives a portion of total profit as incentive fees). Many thanks.

[jeepster]

[DCinvestor]

Yes, I am talking about single project LLCs. I will talk to one or two tax attorneys tomorrow.

[jeepster]

Common practice is, the GP(itself a partnership that is owned by investment managers) receives an annual management fee of 2% of the assets under management plus a "carried interest" of 20% of net operation income that exceed a certain "hurdle" rate of return. In real estate and energy partnerships, the GP may make larger initial capital contributions, >5%.

Under current law, the management fee is taxed like wage and salary income, with a top income tax rate of 39.6 % plus 2.9 % in Medicare taxes, whereas the carried interest is taxed as investment profit, a much lower tax rate. Any portion of the carried interest that represents qualified dividends or long-term capital gains is taxed at a top rate of 20 % plus probably Medicare taxes if applicable. The other portion of carried interest (non qualified dividends or short-term capital gains) should be taxed as income tax. Some attorneys/CPAs argue the whole carried interest should be taxed like wage and salary income, but others disagree.

[DCinvestor]

Thanks. I just talked to a tax law attorney and clarified some of the confusions. He charges 750/hour and needs 10k deposit for the retainer agreement.

Yetao, You should consider becoming a tax attorney--looks like it's very profitable!

[jeepster]