Private Credit Co-Invest / Carry - Tax Efficiencies
For those with co-invest and carry opportunities in private credit - are you able to avoid paying ordinary income tax rates on either piece? Thinking maybe you’re able to fund the co-invest within a company retirement vehicle or some other tactics? Understand carry is really just excess comp so not too concerned there. But particularly on co-invest, it seems like being taxed at ordinary rates with each distribution would kill a lot of the value as compared to just investing in public markets that you won’t need to liquidate for decades. Kills a lot of the attractiveness of the fund leverage on coinvest too - if you realize 10% returns and have 4% rate on leverage, your gain is 6% which then gets cut in half to ~3% post-tax if you’re up around the 50% marginal rate area. Not a lot of juice there.
Both are taxed at capital gains tax rate, same as public markets. My firm also allows funding co-invest with our retirement vehicle which is a nice ability to juice returns
To double check- are you referencing PE or PC? Public debt investments would be taxed at ordinary rates for distributions. I guess you can roll futures for gov debt and get 60% long term/40% short term, but otherwise I don’t think you can get cap gains rates unless I just haven’t looked into it enough?
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I pay ordinary income tax on private credit co-investments. For this reason I intend to make future commitments from a non-taxable account to the extent possible. This exact scenario gave me a better appreciation for tax planning.
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