Obama's attack on real estate investment

President Obama's latest assault on prosperity involves real estate investment. Currently the president is on another campaign bus tour--he's now trying to sell his failed jobs bill, Stimulus II, piece-by-piece.

One of those pieces is a provision to change the tax law regarding "carried interest" derived from investments. It's currently viewed as a capital gain and is taxed accordingly at a lower rate.

NH Journal has more:

The administration describes the treatment of carried interest as a "loophole," but it is nothing of the sort. Changing the tax treatment of these partnerships turns on its head over 50 years of tax law characterizing carried interest as a capital gain. For decades, our tax code has recognized those who invest capital and have expertise to grow businesses. Section 702(b) of the code allows partnerships that realize dividend and long-term gains from their arrangements to be taxed at the capital gains rate, rather than income.

There is a clear reason for this, as carried interest differs substantially from a traditional salary. Under most agreements, the manager of the investment partnership receives no carried interest if the endeavor fails. The manager is also on the hook for returning the principal from the partners, regardless of his performance. Most workers in our economy do not have to return a significant portion of their salary if they do not accomplish what their colleagues and supervisors expect of them.

This tax hike disproportionately hurts real estate, which accounts for almost half of the approximately 2.5 million partnerships affected by this proposal. At a time when the real estate market is struggling, this would be a significant blow to the economy.

A Maine blog, Pine Tree Politics, adds more:

In Maine, as elsewhere, there is a strong need for investment in real estate development and construction projects, which not only bring much needed revenue to states but also provide thousands of jobs nationwide. By allowing real estate investors to keep more of their money, spread out their losses and hedge against the potential pitfalls of the construction industry, the code is actually encouraging growth – a revenue source much more specific and reliable than closing a non-existent tax loophole.

Jeffery DeBoer, head of the Real Estate Roundtable, supports both arguments:

"While the headlines read 'hedge fund,' once serious sunlight is shed on this, people will realize it's a partnership issue," Mr. DeBoer said in an interview. "In fact, the tax increase is squarely aimed at commercial real estate, since 46% of all partnerships in America are real estate and the vast majority of them use a carried-interest structure. It's hard to understand how a proposal that would so dramatically alter the way that real estate has been owned could be considered a productive use of Congress' time, especially at a time when the real estate industry is struggling."

Raising the prospect of fewer development projects convinced politically connected groups like the U.S Conference of Mayors to get in real estate's corner. It also has smaller groups hoping that they will provide what one investment lobbyist calls the "silver bullet" that protects all partnerships.

Technorati tags: real estate economy Barack Obama Obama government arra news politics