CRS: Tax Overhaul Could Change Real Estate Investment Trusts

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March 28 — Changes to real estate investment trusts, such as further restricting spinoffs or banning property with short asset lives, could be fertile ground for lawmakers to sow additional revenue as Congress considers broad-based changes to the tax system.

“Some of the revenue-raising REIT provisions in former Chairman of the House Ways and Means Committee Dave Camp's proposed Tax Reform Act of 2014 (H.R. 1, 113th Congress) were not enacted in the Consolidated Appropriations Act and might be potential base broadening targets in a tax reform,” according to a Congressional Research Service report released March 28.

The Consolidated Appropriations Act (Pub. L. No. 114-113) in December restricted corporations from spinning off property tax-free into real estate investment trusts. It also included a provision increasing—to 10 percent from 5 percent—the stake a foreign investor can own in a public REIT without triggering the Foreign Investment in Real Property Tax Act's withholding taxes. Further, it exempts certain foreign pension funds from FIRPTA withholding (242 DTR GG-4, 12/17/15).

Tighter Restrictions

The “major difference” between the Camp bill and the one signed into law last year is a more restrictive limit on spinoffs, applying them to existing REITs, and imposing a tax on gain for conversions from corporate to REIT status. The revenue gain was estimated to be $5.9 billion in 2014, the report said.

The 2014 bill also sought to disallow assets, such as billboards, with asset lives of less than 27.5 years to no longer be eligible for REIT status. Timber REITs, which account for about 4 percent of REITs, wouldn't qualify under the bill.
Lowering the corporate rate could also erode the relative tax advantages for REITs, which pass the tax liability through to shareholders.

“Senate Finance Committee Chairman Orrin Hatch has indicated interest in a corporate tax integration proposal that might allow corporate dividend deductions (and presumably taxation at ordinary rates for dividends), a treatment that would move ordinary corporations closer to the treatment of REITs,” the report said.

To contact the reporter on this story: Laura Davison in Washington at ldavison@bna.com
To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com