In short
Carried interest is a share of a fund's profits that a manager, such as a private equity general partner, receives for services. Gains on it are long-term only if the assets were held for more than 3 years, rather than the usual 1 year.
Key takeaways
- Gains on assets held 3 years or less are recharacterized as short-term capital gain.
- Receiving a profits interest for services is generally not taxable when it is granted.
- The 3-year rule doesn't apply to capital the manager invested.
Where it's tested
TCP: Partnership Compliance & Planning — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A partner contributes land with a basis of $40,000 and a fair market value of $100,000. Three years later the partnership sells the land for $110,000. How is the gain allocated?