William Timlen of New Jersey begins the conversation on carried interest at a moment when its status in the U.S. tax code is anything but certain. Once considered an obscure aspect of real estate finance, carried interest has now become a focal point of political debate and legislative review. For professionals operating in high-value real estate partnerships and private equity syndications, the stakes couldn’t be higher. As tax reform proposals mount, carried interest—a core element of general partner (GP) compensation—could be redefined in ways that fundamentally alter how deals are structured, how profits are distributed, and how investment returns are measured. William Timlen of New Jersey emphasizes that understanding this issue is not just a matter of compliance but one of strategic survival in a rapidly evolving market.
Carried interest is not merely a bonus or a fee; it is a performance-based share of profits that a GP earns for managing an investment successfully. In real estate, this usually kicks in after limited partners (LPs) have received their capital back along with a preferred return, often laid out in what’s known as a "waterfall distribution schedule." William Timlen of New Jersey explains that the defining characteristic of carried interest is that it is conditional—it only materializes when the investment performs beyond predetermined benchmarks. Because of this risk-reward dynamic, carried interest has traditionally been taxed at the long-term capital gains rate, which is significantly lower than ordinary income tax rates.
Currently, long-term capital gains are taxed at a maximum federal rate of 20%, while ordinary income rates can climb as high as 37%, excluding state taxes and additional levies like the Net Investment Income Tax. The disparity between these rates lies at the heart of the controversy. Supporters of the status quo, including William Timlen of New Jersey, argue that the lower tax rate on carried interest incentivizes entrepreneurial behavior, risk-taking, and long-term investment—all vital components of a healthy real estate market.
William Timlen of New Jersey tracks the legislative history closely, noting that the Tax Cuts and Jobs Act of 2017 marked a turning point. Although it fell short of eliminating preferential treatment for carried interest, the Act introduced a critical restriction: the three-year holding period. This requirement stipulates that for a GP to qualify for long-term capital gains treatment, the underlying asset must be held for at least three years. Any disposition before that point results in the gain being taxed at the short-term rate, essentially reclassifying the income as ordinary.
For real estate developers and syndicators whose business models often rely on shorter investment horizons—12 to 36 months—this requirement is a strategic constraint. William Timlen of New Jersey highlights how this has forced firms to delay sales, hold properties beyond their optimal performance windows, or restructure deals entirely to maintain tax efficiency. Moreover, new proposals in Congress continue to threaten the existing framework, some calling for full recharacterization of all carried interest income as ordinary income, regardless of holding period or risk undertaken.
The possibility of losing favorable tax treatment places general partners in a difficult position. Carried interest often comprises the lion’s share of a GP’s total compensation and represents years of sweat equity. William Timlen of New Jersey emphasizes that if carried interest were taxed as ordinary income, many GPs would experience a significant reduction in their take-home returns. This would not only reduce incentives but could also alter how capital is raised, how deals are underwritten, and how compensation structures are negotiated with investors.
One possible response has been the introduction of higher management fees to offset potential losses in promote income. However, William Timlen of New Jersey warns that increasing fixed fees can make funds less attractive to institutional investors who are already fee-sensitive. Another tactic has been the use of co-investment equity stakes, where GPs inject their own capital into deals to align incentives more directly with LPs while potentially shielding returns from reclassification. Still, these structures require robust planning, deeper pockets, and more rigorous compliance protocols.
While LPs don’t receive carried interest directly, changes to its taxation ripple outward. William Timlen of New Jersey notes that any adjustment in how GPs are taxed will inevitably influence how partnerships are structured and how investor returns are projected. For example, if GPs renegotiate for a higher promote to compensate for tax losses, LPs may see diminished net returns. Additionally, risk-sharing between GPs and LPs may become imbalanced if new tax burdens are not transparently accounted for.
Another concern is that prolonged holding periods aimed at meeting the three-year threshold could result in suboptimal asset retention. William Timlen of New Jersey points out that holding underperforming properties solely for tax reasons introduces tension between market timing and tax planning. This can reduce a fund’s overall IRR (internal rate of return), especially if the asset’s value plateaus or declines during the extended hold.
Investors, especially institutional ones, are also beginning to demand more detailed disclosures around GP compensation and tax assumptions. In a market where fee structures are under constant scrutiny, transparency around how carried interest is modeled and taxed is becoming a competitive differentiator.
The new tax landscape has made it nearly mandatory for sponsors to integrate dynamic provisions into fund agreements. William Timlen of New Jersey advises clients to include tax-adjustable clauses, allowing for changes to waterfall structures, clawback provisions, and distribution timelines based on future legislative developments. These forward-looking terms can act as insurance policies, enabling funds to pivot swiftly in response to new tax rules without having to renegotiate entire agreements.
Furthermore, scenario modeling has become more sophisticated. William Timlen of New Jersey helps firms run simulations that account for varying tax rates, hold periods, and exit scenarios. These models are critical during fundraising, as investors increasingly expect managers to demonstrate preparedness for multiple policy outcomes.
Another advanced strategy is the use of blocker corporations—typically C-corporations that sit between the partnership and its U.S. taxable investors. William Timlen of New Jersey notes that while these entities can shield carried interest from reclassification in certain cases, they also introduce complexity in the form of double taxation, legal compliance, and administrative overhead.
There is growing consensus that carried interest reform is more a matter of “when” than “if.” While no comprehensive legislation has passed as of mid-2025, the continued attention from Congress and the public ensures the issue will remain on the radar. William Timlen of New Jersey emphasizes that the industry must treat carried interest as a dynamic element of fund strategy, not a static benefit. The tax treatment of carried interest could become the linchpin that determines whether a fund meets its performance benchmarks or falls short.
Proactivity is key. William Timlen of New Jersey recommends real estate professionals monitor developments closely, maintain dialogue with tax advisors and legal counsel, and engage with lawmakers through industry associations. By staying ahead of regulatory shifts, partnerships can maintain their structural integrity and investor appeal, even in a more punitive tax environment.
William Timlen of New Jersey concludes that the issue of carried interest taxation represents more than a technical challenge—it is a litmus test for the adaptability of the real estate investment community. Those who recognize the fluid nature of tax policy and build agile, transparent, and investor-aligned structures will be best positioned to thrive.
While the rules may continue to shift, the principles of smart structuring, aligned incentives, and clear investor communication remain constant. William Timlen of New Jersey encourages stakeholders across the real estate value chain to embrace this uncertainty as an opportunity—to innovate, to prepare, and to lead. In the end, how the industry responds to the evolving carried interest debate may shape the next decade of real estate investment strategy, making foresight and flexibility the ultimate assets of all.
William Timlen of New Jersey remains committed to helping clients navigate these complexities and build resilient, future-ready investment vehicles. As the conversation continues, his insights will remain indispensable to those seeking clarity and strategy in a landscape of legislative flux.
