is the excess 30% profits interest considered carried interest?
Yes.
If so, is the carried interest taxed at LTCG at the end of the project?
First things first. You have to consider whether or not the “flip” is a taxable event in and of itself (i.e. a taxable capital shift). Most of my clients don’t like this idea, so we ignore it. Here’s an example: Let’s say we have the 35 pure/65 development initial split. While capital may have been returned, and while a preferred return on capital may have fully occurred, we’d still have capital account balances because of differences between income allocations and actual cash distributed. And then, we’d shift that capital from 35/65 to 65/35. (Note that this presumes that the promote is a capital interest; sometimes it’s very hard to tell from the Operating Agreement). Part of the issue here is whether or not a shift should occur or if the ending pre-flip capital accounts don’t get shifted, and instead, remain intact…with the post-flip allocations simply starting from ground zero.
In other words, say cap accounts are $6,500 pure and $3,500 dev. We hit our milestone. Do we flip to $3,500 pure and $6,500 dev? If we do, some would argue for a taxable capital shift. In which case, we’d need to consider values, which may be well in excess of $10k. Or, do we leave things as is, such that final payouts will account for allocations that are baked in to the pre-flip capital accounts?
Now back to your question about LTCG @ end of project. One thing to note here is that the flip might take place well before the project is “sold.” So, we might have allocations going 35% pure and 65% dev for a while before selling the projection. But when the project is sold, it wouldn’t be LTCG if we’re talking about an apartment complex. It would be Sec 1231.
I think we all understand the intent behind the promoted interest. It’s just that the devils are in the details, including the Operating Agreement, and intentions aren’t always reflected in the written word.