Real Estate & Passthrough Finance Techniques Corner: New Partnership Carried Interest Provision: Plugging a Loophole with a Labyrinth

The Tax Cuts and Jobs Act of 2017 added a new Code Sec. 1061 to the Code, which changes the tax treatment of certain profits interests. For purposes of determining a taxpayer's long-term capital gain with respect to an applicable profits interest, the provision extends the required holding period from more than one year to more than three years. This column summarizes the rules of Code Sec. 1061 and identifies some of the uncertainties and interpretive difficulties of the new provision. Partnerships commonly issue interests in future partnership profits to service providers (a "profits interest" or "carried interest"). A profits interest is any interest in a partnership that is not a "capital interest." A "capital interest" is an interest in a partnership that, immediately after receipt of the interest, would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership.