The United States Congress is looking to tax carried interest as regular income as opposed to capital gains as it is now. The motivation is that some hedge fund managers and venture capitalists are reaping huge windfalls and that is not fair.

But Congress is falling into the trap of the law of unintended consequences. In their lust for new sources of revenue and punishing super-achievers the real victims of the tax policy will be the real estate investor. As Jeffrey D. DeBoer of the Real Estate Roundtable explains, the victims of the tax increase will not be the hedge fund managers but the real estate partnerships.

About 15 million Americans are partners in more than 2.5 million partnerships. They manage nearly $12 trillion in assets and generate roughly $400 billion in annual income. Taxing all carried interests in partnerships as ordinary income would be a whopping 133% tax increase. As much as $20 billion in value annually could be driven from the economy.
The jobs and tax revenue that real estate creates support our economy: 46% of all partnerships are engaged in real estate and 60% of their income is capital gain income. Real estate general partners put “sweat equity” into their business, fund the predevelopment costs, guarantee the construction budget and financing, and expose themselves to potential litigation over countless possibilities. They risk much. Their gain is never guaranteed. It is appropriately taxed today as capital gain.
This proposal would make it more expensive to build modern shopping centers, offices and apartments, especially in long neglected neighborhoods or on land with potential environmental contamination. Some development simply won’t happen. via  USATODAY.com.

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