The United States Senate passed the Reduce Inflation Act of 2022 (Law) on August 7, 2022. The developer will retain interest in the development venture for five years instead of his current three years as required by Section 1061 of the Internal Revenue Code (Code). But thanks to the efforts of Senator Kristen Cinema, that provision was removed from the law passed by the Senate.
As the sponsor of a development contract, the developer typically retains a holding interest in the limited liability company or partnership, a portion of the project’s profits (usually if the project reaches certain return benchmarks). As long as the developer has held her interest in that carried for at least 3 years, realized profits will be treated as long-term capital gains rather than recurring income and will be subject to a preferential tax rate (maximum current long-term capital gains tax rate) will be is 20%, but the highest ordinary income tax rate is 37%).
The carry interest clause in the Code of Conduct has been attacked over the years, but thankfully it still stands. The bill is now moving to the House of Representatives and hopefully it will pass the bill that passed the Senate.