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A proposed tax law change could influence CRE projects

Commercial real estate developers in Ohio and around the country generally base their decisions on market data, experience and intuition, but their actions are also influenced by the nation's financial regulations and tax laws. Financial experts have paid little attention to the tax rules pertaining to hedge fund carried interests as they have remained stable for decades, but changes proposed by the Internal Revenue Service would almost double the the tax rate. Industry analysts say that the IRS proposal, if it were to be enacted, could severely impact the entire commercial property sector.

Carried profits are earned by general partners, and financial reforms introduced during the 1990s changed the way that they are taxed. Since the 1990s reforms went into effect, general partners have been paying capital gains tax rather than income tax on carried interests. However, the IRS now wants to revert back to treating them as ordinary income, which would push the tax rate up from 20 percent to 39.6 percent for high earners.

The IRS proposed the changes to address issues surrounding the compensation of hedge fund managers, but the rules would apply to all general partners including those involved in real estate projects. According to the IRS, the changes are warranted because carried profits are essentially fees paid for services rendered and should, therefore, be taxed as regular income. Experts say that the proposed change could affect commercial real estate growth by making developers more cautious and risk averse.

Risk and reward are inextricably linked, and developers who become overly conservative may find it difficult to survive in the highly competitive world of commercial real estate. Risk can be mitigated by completing projects on time, and attorneys with experience in this area could help developers to avoid ruinously expensive construction delays by addressing disputes quickly and decisively.

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