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The United States Senate passed the Inflation Reduction Act of 2022 (Act) on August 7, 2022. As introduced in the Senate, the Act included a provision regarding carried interest (known to proponents real estate as “developers”) which would have required developers to retain their interest in the development business for five years, instead of the current three years required by Section 1061 of the Internal Revenue Code (the Code) . Thanks to the efforts of Senator Krysten Sinema, however, this provision was removed from the version of the law passed by the Senate.

As the sponsor of the development agreement, the developer usually retains a stake in the limited liability company or partnership – that is, a share of the profits in the project (usually provided that the project achieves certain performance criteria). As long as the promoter retains its carried interest for at least three years, any realized gain is treated as a long-term capital gain, rather than ordinary income, which is thus entitled to the preferential tax rate (the current maximum tax rate on long-term capital gains is 20%, while the top ordinary tax rate is 37%).

The Code’s deferred interest provisions have been attacked over the years, but thankfully continue to survive. The legislation is now moving to the House, which will hopefully pass the legislation as passed by the Senate.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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