Obama win likely to mean tax increases

Capital gains, and with it carried interest, is “highly likely” to see taxation hikes in the early days of a Barrack Obama presidency, according to industry lawyers speaking to PERE.

Following yesterday’s historic US presidential election, which saw Democrat candidate Obama overwhelmingly beat his Republican rival, John McCain, attorneys specialising in private equity and real estate fund formation said taxes would be among the early contenders for change.

Josh Sternoff, a partner of New York-based law firm Paul Hastings, said Obama had “explicitly” highlighted carried interest as a possible target for tax increases, and following the Democratic Party’s increased majority in the Senate and House of Representatives, it could be one of the issues “targeted for early term changes.”

“Nothing about this victory indicates a move away from the proposal to tax carried interest as ordinary income. The devil will be in the detail but there should be no doubt that this administration will be looking for revenue sources and revenue offsets for the things the new administration wants to do,” Sternoff added.

At present carried interest is taxed at the 15 percent capital gains rate, instead of at the individual income tax rate that would otherwise apply, typically 35 percent for high-income individuals. Scott Arnold, leader of King and Spalding’s real estate group and co-head of the law firm’s real estate capital markets group, said it was one area that Obama would likely target.

Arnold said the private equity real estate industry should be “anticipating tax increases at every available point”, however he said the new administration could not ignore the economic situation, which was the “gorilla in the room” for Obama. “It’s fair to say any tax increases at any point might dampen transaction activity, and that’s the big problem for the US economy right now.”

Obama’s election though could also herald increased investment activity in the US, Arnold added, not least with European and Middle Eastern investors. “I do think his election will generate a greater willingness to invest in America. Whether financial conditions in those regions permit that is an entirely separate question,” he said.

As Obama now prepares to appoint key members of his administration, private equity real estate will be following events closely, Sternoff continued.

The overall stewardship of the US economy was vital to the future health of the real estate market, he said, adding: “People will be looking for indications that Obama has a steady, reassuring hand on how to tackle this economic crisis, and who he appoints as Treasury Secretary will be vital to that.

“Dealing with the economic situation is vital to real estate. Real estate has been at the centre of much of this crisis and is likely to be at the heart of solutions in dealing with it.”