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 interests (known to real estate developers as “promotes”) that would have required that developers hold on to their interest in the development venture for five years, rather than the current three years required by Section 1061 of the Internal Revenue Code (the Code). Thanks to the efforts of Senator Krysten Sinema, however, that provision was stricken from the Senate-passed version of the Act.

As the sponsor of the development deal, the developer typically retains a carried interest in the limited liability company or partnership – i.e., a share of profits in the project (usually upon the condition that the project hits certain return benchmarks). As long as the developer holds its carried interest for at least three years, any realized gain is treated as long term capital gain, rather than ordinary income, which is thereby entitled to the preferential tax rate (the current maximum long term capital gains tax rate is 20%, while the highest ordinary income tax rate is 37%).

The carried interest provisions of the Code have been attacked over the years, but, thankfully, continue to survive. The legislation now moves to the House, which will, hopefully, pass the legislation as passed by the Senate.