The Tax Cuts and Jobs Act of 2017, P.L. 115-97 (the Act), enacted new Code section 1061. The Act was signed into law on Dec. 22, 2017. New Code section 1061 is effective for taxable years beginning after 2017 and has changed the holding period for capital gains realized by a taxpayer who holds an applicable partnership interest (as defined below). Under the new law, a taxpayer who holds an applicable partnership interest will recognize net long-term capital gain with respect to such interest only if the taxpayer has held the interest for at least three years. If the three-year holding period requirement is not met, the taxpayer’s net long-term capital gain will be treated as a short-term capital gain, notwithstanding Code section 83 or any election made under Code section 83(b).
It should be noted that short-term capital gains are potentially subject to tax at federal ordinary income rates of 37 percent, plus the 3.8 percent Medicare tax on unearned income, if applicable. In addition, the three-year holding period rule applies to capital gains recognized after 2017, regardless of when the taxpayer acquired the applicable partnership interest.
New Code section 1061 will affect many hedge funds, private equity funds and real estate funds.