The Real Deal New York

Scott Stringer attacks “carried interest” tax treatment

The use of so-called promotes in real estate deals could be in jeopardy

January 13, 2014 11:02AM

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NYC Comptroller Scott Stringer

NYC Comptroller Scott Stringer

A type of performance fee that gives developers a leg up for taking the lead on real estate projects may be cut at the knees by New York City’s new comptroller Scott Stringer, who condemns the fee as a tax loophole.

Stringer characterized “carried interest,” as a tax break for the rich, because it is taxed at a lower rate than ordinary income. Also known as a “promote,” carried interest is taxed at capital gains rates, generally about 20 percent as opposed to the normal income tax rate of around 40 percent, as The Real Deal has reported.

“The city and state should work together to close the Unincorporated Business Tax’s carried interest loophole — one of many tax policies at the federal, state and city level that have contributed to an unfair system where middle-class New Yorkers pay more income tax than high-level private equity managers,” Stringer told the New York Post.

Private equity firms, hedge funds and capital venture firms are the usual beneficiaries of carried interest, according to the Post. In real estate, a promote is a financial interest in the long-term capital gain of a development project.

“The carried interest is the bedrock of most real estate deals that I have seen,” Peter Hauspurg, CEO of Eastern Consolidated, has told The Real Deal in the past. Nabbing a share of the upside is “the only way to get compensated,” Hauspurg said.

During his campaign for mayor, Bill de Blasio also supported closing the loophole, as The Real Deal reported. But Stringer will have to appeal to Assembly Speaker Sheldon Silver and Governor Andrew Cuomo in order to get Albany on board with his plan, and sources told the Post that would likely prove difficult. [NYP– Angela Hunt

  • Graveshift

    Sounds like Stringer is trying to jump on the Mayor’s bandwagon. Promoted interests are technically worth zero at the closing, given the success of the project is not guaranteed and requires extensive undertaking. To treat the carried interest as if it was cash upfront or cash rolled into the deal is comparing apples and oranges. Maybe Stringer should take a snapshot of the deals closed between 2006-2008 and see how many hard working real estate professionals made zero on their interest.

  • Growupscottie

    This is the only way for developers to get compensated for their work and risk. The City needs these developers to build housing for the less fortunate. Isn’t that right community organizers? If stringer thinks this is a good idea or that it will endear him to the other Marxists he is wrong on both counts. Don’t kill the goose you idiots or you will have nothing. Hard to know with him, Stringer is such a suck-up he even got married out of state so he could kiss ass to the LBGT crowd. Maybe Spitzer would have been better…at least Spitz is rolling with the Lay-deez

  • Oh Well

    I assume you woudn’t have to pay the tax untill you get the cash.
    Frankly I see their point. I used to work on contingent legal cases not seeing a dime untill final settlement which could take years if at all. Had to pay tax at ordinary tax rates.

    • Now for the facts

      All – This is an irrelevant conversation. In New York all income is taxed at the SAME city/state tax rate irrespective of whether it is salary income, capital gains income or promote income. Only the IRS differentiates by having a lower rate for capital gains (23.8% with the medicare tax) versus ordinary income rates (up to 39.6%). Thus, Stringer succeeding here does nothing to raise tax revenue for New York. On the contrary, it may drive some private equity executives out of the city if they feel that they can lower their nearly 13% state/city tax bite as a way to offset an federal tax bill. increasing by roughly the same amount. Of course, why would any politician let the facts get in the way of a good issue that stokes emotions about income disparity…

  • Common Sense

    Carried interest is different from ordinary income and should be taxed differently. There are reasons the two receive different tax treatment. In many countries carried interest is taxed at zero percent. To say the two are the same is to admit you just don’t know what you’re talking about.

  • brklynmind

    Carried interest is a joke. If you are paid as “promote” or other similar arrangement – you are being paid for your LABORs and should pay income tax as wages. If you then take that money and invest it in the deal (or another) then it is a capital investment and you should pay capital gains tax on any subsequent gain..

  • A Logical View

    Carried interest is simply a tax loophole that needs to be closed. Why take a salary when you can take an percentage and pay a lower tax rate. It is unquestionably unfair to the rest of those who work and pay regular income tax. More power to Scott Stringer and I hope those in Albany have the guts to follow through and do what is right.

  • Now for the facts…

    All – This is an irrelevant conversation. In New York all income is
    taxed at the SAME city/state tax rate irrespective of whether it is
    salary income, capital gains income or promote income. Only the IRS
    differentiates by having a lower rate for capital gains (23.8% with the
    medicare tax) versus ordinary income rates (up to 39.6%). Thus,
    Stringer succeeding here does nothing to raise tax revenue for New York.
    On the contrary, it may drive some private equity executives out of
    the city if they feel that they can lower their nearly 13% state/city
    tax bite as a way to offset an federal tax bill. increasing by roughly
    the same amount. Of course, why would any politician let the facts get
    in the way of a good issue that stokes emotions about income
    disparity…

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