The PATH Act Brings Important REIT Changes

New law ahead road signBY:  Amanda Wilson

The recently enacted PATH Act included several important changes to the REIT tax rules.  A full discussion of these changes can be found here.



REITs Targeted In Extenders Bill

Capitol buildingBy:   Amanda Wilson

Earlier this year, I discussed the IRS’s recent no rule policy on spin-offs, and how that would likely have a chilling impact on spin-offs, particularly the common practice of businesses spinning off their real estate in a REIT (discussed here).  My prediction is coming true as this week Yahoo announced that it was cancelling its Alibaba spin-off since it could not get an IRS private letter ruling that the spin-off would be tax-free.

Well, REITs are being further targeted.  Yesterday, a two-year tax extenders bill was introduced in the House.  This was not a surprise.  The surprise was that the bill includes two provisions that will have major impacts on REITs.  First, the bill provides that a spin-off of a REIT will only be tax free if, immediately after the distribution, both the distributing and controlled corporations were REITs (the IRS no rule policy had a similar provision).  So a REIT can divide and spin-off its assets, but existing C corporations would no longer be able to spin-off their real estate in a REIT.  If enacted, this provision would currently apply to deals in progress.  In other words, any spin-offs currently in the planning stage wouldnot be grandfathered in and would be killed by this bill.

The bill also introduces a new rule that targets fixed percentage rent and interest income received from a related party.  If a REIT receives such rent or income from a single C corporation tenant and it exceeds 25% of the combined rent and interest income received by the REIT, the new bill would provide that this income no longer qualifies as rents from real property and interest (i.e., is no longer good REIT income).

Stay tuned to see what happens!

IRS No Rule Policy Expected to Cool Down Spin-offs

By:  Amanda Wilson

On Monday, the IRS released Notice 2015-59.  In it, the IRS announced that the IRS will no longer issue private letter rulings on whether a distribution satisfies the requirements of Section 355 for a tax-free spin-off where (i) the spin-off  involves a real estate investment trust or a regulated investment company, (ii) the active business is small compared to the other assets, or (iii) the investment assets are significantly greater than the other business assets.  In the case of transactions involving REITs, the IRS stated that it was generally not concerned about transactions in which both the distributing corporation and the controlled corporation have been and will continue to be REITs or where the distributing corporation has been a REIT for a substantial period of time.  The IRS further stated that it will continue to rule on such transactions.

The notice also provided that the IRS and Treasury believe that the types of transactions on which the IRS will no longer rule may not satisfy the requirements of Section 355 and are studying this issue.

This notice will likely have a significant cooling effect on companies that were considering a spin-off.


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