Section 1061 of the Internal Revenue Code reshapes how investment profits are taxed, particularly for fund managers receiving carried interest.

1. Understanding Section 1061:
Carried Interest Rules
Section 1061 of the Internal Revenue Code reshapes how investment profits
are taxed, particularly for fund managers receiving carried interest.

2. The Three-Year Rule
Pre-2017
Fund managers paid lower capital gains rates (20-23%) after
holding assets for just one year.
Tax Cuts and Jobs Act
Introduced Section 1061, changing the holding period
requirement.
Current Rule
Fund managers must now hold assets for more than three years
to access lower tax rates.

3. Applicable Partnership Interest (API)
Partnership Stake
Received for providing substantial services
Applicable Trade or Business
Managing investment capital and financial assets
Financial Assets
Including real estate held for rental or investment
An API describes a partnership stake received for services to businesses that manage investments or financial assets.

4. Key Exceptions to Section
1061
C Corporations
Regular corporations are excluded from the three-year holding
requirement.
Personal Capital
Fund managers' own invested money remains unaffected by the three-
year rule.
Bona Fide Purchasers
Third-party investors who buy carried interest at market value are
excluded.
Non-ATB Employees
Employees not performing investment management services may avoid
the requirement.

5. Strategic Planning Options
Extended Holding
Hold investments past three years when possible.
Carried Interest Waivers
Postpone receiving carry until qualifying for lower tax rates.
Section 1231 Exception
Use business property rules to avoid the three-year holding
period.
Alternative Structuring
Structure acquisitions to avoid Section 1061 application.