Investment, private equity, and real estate fund managers should consider becoming familiar with the complex final regulations on the preferential tax treatment of “carried interest” under Section 1061 of the Internal Revenue Code (Code) that are generally effective for taxable years beginning on or after Jan. 1, 2022.
Frequently referred to as “promote” in the real estate investment fund industry, a “carried interest” is a profits interest in an investment-focused partnership or limited liability company taxed as a partnership for federal income tax purposes (each, an “Investment Pass-Through Entity”) held by the manager providing investment management services to such entity for a fee (Fund Manager) (e.g., the general partner of the partnership or the managing member of the limited liability company).
For the Fund Manager, the principal advantage of a carried interest/promote lies in the preferential federal income tax treatment on distributions from the Investment Pass-Through Entity: If the assets in the Investment Pass-Through Entity are held for the requisite holding period (currently, more than three years; prior to 2018, more than one year), gains from the sale of such assets are passed through to the Fund Manager — and, by extension, to employees of the Fund Manager directly or indirectly, through the Fund Manager, holding equity interests in the Investment Pass-Through Entity — as capital gains, rather than as gains...
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