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Senate Tweaking Carried Interest; CRE Recovering? (Wednesday's News & Notes)

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I'm doing some long overdue catch-up with some of the links below. We've been spending the last few days trying to get our heads around what's going on with taxation of carried interest.

On that front, the New York Times Dealbook blog described in some detail how the Senate is looking at possibly softening the tax in contrast to what passed the Senate.

This modification decreases the amount of carried interest that is recharacterized as ordinary income from 75 percent to 65 percent and increases the amount treated as capital gains from 25 percent to 35 percent in taxable years beginning after December 12, 2012. The change further decreases the amount of carried interest that is recharacterized as ordinary income to 55 percent and increases the amount treated as capital gains to 45 percent for gain or loss attributable to the sale of an asset which is held for 7 or more years.

Meanwhile, Real Estate Roundtable President and CEO Jeffrey DeBoer is keeping the pressure in attempts to prevent any kind of change in taxation. Today he's got an OpEd in Congressional publication The Hill.

Real estate makes up nearly 50 percent of all partnerships in America. While some will claim carried interest is a loophole, the carried interest tax hike now making its way toward the Senate floor is, more than anything, a tax on real estate partnerships large and small. It is not a tax on hedge funds that tangentially affects real estate; it is a real estate tax hike that tangentially affects hedge, venture capital and private equity.

According to the IRS, these real estate partnerships hold over $1.5 trillion of commercial real estate assets throughout America, including: rental housing, office buildings, shopping centers, medical facilities, hotels, senior housing and industrial properties. The carried interest tax proposal would change the taxation of all these partnerships – for past and future investments.

Meanwhile, Eddie Lampert is already looking for ways to avoid paying the higher tax, should it go into effect. The hedge fund Lampert founded, ESL Partners LP, has distributed about $829 million of stock in Sears Holdings Corp., AutoNation Inc. and AutoZone Inc. to him and will transfer more in July. By taking direct ownership of the shares, he will be taxed a the capital gains rate.

Here are some links to other recent blog entries and stories of interest to the retail real estate industry.

  • The Los Angeles Times says that the worst might be over for commercial real estate. The story points to an uptick in investment in properties as one reason to think that the sector may be recovering. The outlook depends greatly on how the market for distressed real estate continues to develop. We have not had the tsunami of nasty properties hitting the market and perhaps that tsunami simply isn't coming. Instead, properties are being trickled out and banks are trying to hold on and hope for recovery as long as possible where they can rather than putting properties on the market.
  • GE Capital, however, may not have such a bright view of the sector. It is planning to cut its commercial real estate portfolio in half. It will reduce the portfolio from $80 billion down to $40 billion. Let's hope it can do that without flooding the market.
  • Discount retailer Daffy's is seeking a financial partner in order to facilitate the chain's expansion.
  • Lastly, David Moquin at the Llenrock Blog looks at REITs and real estate ETFs with some tips about how to invest in real estate.

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Elaine Misonzhnik

Senior associate editor Elaine Misonzhnik has been writing for National Real Estate Investor since June 2006 and has covered commercial real estate for more than 12 years. She first became...
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