The real estate industry is mobilizing against legislation intended to target private equity firms and hedge funds that would also raise taxes on real estate partnerships.

More than a dozen lawmakers on Capitol Hill, including the chairman of the House Ways and Means Committee, Rep. Charles Rangel of New York, are co-sponsoring a bill that would more than double the tax rate on companies that have partnership structures. The bill targets high-flying private equity firms and hedge funds, whose billions of dollars in profits have dominated the front pages. But an unintended mark will be the $1 trillion worth of privately held commercial and residential real estate.

“This is a very big deal and it could have a tremendous negative impact on the real estate market,” the president of the Real Estate Board of New York, Steven Spinola, said. He met last week with members of the House Ways and Means Committee in an effort to convince them to exempt real estate partnerships from the legislation.

At issue is a House bill that would require managers of partnerships — including most privately held real estate companies — to pay ordinary federal income-tax rates that top out at 35% of their profits instead of the long-term capital gains rate of 15%. The House Ways and Means Committee is scheduled to hold its first hearings on the bill in September.

“This bill is so inappropriate it defies words,” the chairman of Time Equities, Francis Greenburger, said. The real estate firm, which owns 15.5 million square feet of property and 3,500 apartments around the country, employs a series of partnerships. “Being taxed as ordinary income could eliminate our business,” he said.

Like private equity firms and hedge funds, real estate owners form partnerships with investors who help finance their acquisitions. These owners are paid fees for their services, such as leasing office space and renting apartment units, which are taxed as ordinary income. Landlords are also paid so-called carried interest — a fee, usually 20%, that they collect on the company’s profit — that is taxed at the capital gains rate.

“Carried interest is granted… not for ministerial services, like leasing and property management, but for the value he or she will add to the venture beyond routine services and the risk he or she takes,” the senior vice president and counsel of the Real Estate Roundtable, Steven Renna, wrote last week in a letter to the House of Representatives. “Carried interests have been a fundamental part of investment partnerships for decades and this legislation reaches far beyond the super rich to entrepreneurs of all sizes.” Members of some of the nation’s largest real estate groups, including the Mortgage Bankers Association, the National Association of Realtors, and the International Council of Shopping Centers, signed the letter.

But legislators say landlords, like managers of private equity firms and hedge funds, provide services, not capital, and should be taxed to reflect this. “If you provide capital, you should be able to get capital gains treatment, but if you provide services, then this is considered ordinary income,” a tax partner at Stroock & Stroock & Lavan, Micah Bloomfield, said.

“The bill, as introduced, would not raise tax rates on investments of actual capital in real estate or other property,” a spokesman for the House Ways and Means Committee, Mathew Beck, said.

The legislation would slow the market, driving down property values by lowering the after-tax returns on real estate investments, Mr. Renna said. Real estate owners would also be more likely to hold onto properties for longer periods, diminishing federal capital gains tax revenues and lowering the proceeds from local transfer taxes.

Commercial real estate projects that are financed with bonds could also be at risk. “If the government retroactively changes the tax implications on commercial bonds, it could throw any number of projects into uncertainty,” Mr. Spinola said. “With the secondary mortgage market already in major trouble, we don’t need to add problems for the commercial side.”

There may be ways, however, to circumvent the law. Government tax experts have acknowledged that in some industries, including real estate, it may be possible for partners to make capital contributions to be eligible for the capital gains tax treatment.

Still, real estate firms will have a tougher time navigating these new rules. Hedge funds and private equity firms are mobile, easily relocating to areas with lower tax rates.

“Take a look at Greenwich — a lot of hedge funds have moved out there to take advantage of the 4% local tax rate,” the president of New York City-based hedge fund, Aurelian Management, Brian Horey, said. “If half the hedge funds moved to Greenwich for the lower tax rate, imagine what will happen when you raise taxes by 20%?”

The solution is not as easy for real estate companies. “A lot of private equity and hedge funds guys could leave New York, but real estate has to stay here,” Mr. Spinola said. “That said, we are looking at whether there may be ways to change this.”