This Sunday, the Senate passed the Inflation Reduction Act, an economic package designed to combat climate change, lower health care costs, and increase corporate taxes. However, a major point of contention for the bill within multi-family sector was the carried interest provision.

For multifamily properties, carried interest is an important aspect of the tax code. The bill would have required a carried interest stemming from real estate to be held for five years to receive long-term capital gains tax treatment, rather than for three years, raising $14 billion for government funding. This allows them to tax the carried interest at short-term capital gain (taxed the same as ordinary income at 35%) for two more years rather than as a long-term capital gain (15%). 

 According to the National Apartment Association (NAA), the use of carried interest is “an essential tool in the development of new and the rehabilitation of existing rental housing” Upon discovering the provision, the National Association of Realtors (NAR) alongside with other real estate trade groups sent a letter to all senators urging the provision to be dropped from the bill. The provision was removed due to objections from Senator Kyrsten Sinema, whose vote was needed to pass the bill. 

“The carried interest provision would have been a disincentive to investment in real estate particularly in housing,” Real Estate Roundtable CEO Jeff DeBoer said to Bisnow. “It would have discouraged capital coming into the industry at a time when lenders and the capital markets are already tightening.” 

However, the Inflation Reduction Act did include multiple energy tax credits for both residential and commercial buildings. Read  more about the available tax credits here.

Overall, the Act is coming at a vital point in the American economy. With recession fears and inflation growing at historic rates, changes to the economy are needed to avoid a major financial crisis.