IRS Final-Carried Interest Regulations More Favorable to Fund Managers
Highlights
The Treasury Department and the IRS have scaled back the proposed related party transfer rules under Section 1061, now requiring recharacterization rather than acceleration of gain
The final regulations provide limited relief for qualifying capital interests to be excluded from Section 1061 treatment, offering less rigidity
The rules now will “look through” to the partnership’s assets where a partner satisfies the three-year holding period only where there is a principal purpose of avoiding the application of Section 1061
On Jan. 7, 2021, the Internal Revenue Service (IRS) and the Treasury Department issued final regulations regarding the treatment of carried interests, or profits interests in partnerships that generally entitle service providers to share in appreciation at capital gains rates. Fund managers generally will be pleased that these final regulations removed or scaled back some of the more onerous provisions of the prior proposed regulations.
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