#carried-interest
Section 1061 three-year holding period rules, applicable partnership interests, capital interest exception, and tax treatment of profits interests for hedge fund, private equity, and venture capital fund managers
Section 1061 grants carried interest long-term rates only when assets are held over 3 years; otherwise the manager's profit share is taxed as ordinary income.
A real estate syndication waterfall pays limited partners in four tiers — return of capital, a 6–10% preferred return, a sponsor catch-up, then a 70/30 or 80/20 residual split. This guide works the math on a $100,000 investment, explains capital-call dilution, why a K-1 can show a loss while you received cash, and lists ten questions to confirm before wiring money.
Since the Tax Court's 2023 Soroban decision, a state-law limited partner label no longer shields distributive share from 15.3% self-employment tax. This guide walks through the functional test under Section 1402(a)(13), the Renkemeyer line of cases, the 2024 proposed regulations, and the planning moves that still hold up for fund managers, LLC members, and operating partners in 2026.
Schedule B-1 of Form 1065 uses Section 267(c) attribution — not Section 318 — to identify partners who own 50% or more of profit, loss, or capital. A practical guide for tiered partnerships, family holding LLCs, and private equity fund structures.
Section 1061 recharacterizes carried interest gains from long-term to short-term unless the underlying asset was held more than three years — a 17-point federal rate swing for hedge, PE, and VC fund managers. A practitioner guide to applicable partnership interests, Worksheet A and B reporting, the capital interest exception, and 2026 planning moves.
