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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!

Yet Another Benefit of REITs – Tax-Free Spinoffs

By Amanda Wilson

With the introduction of the RIDEA structure in 2007, REITs have become an increasingly popular tax structure for senior housing. REITs offer many tax advantages, such as providing the REIT entity with a tax deduction for dividends to its shareholders, which effectively provides for a single layer of taxation rather than the double layer of taxation that is imposed on most corporations.

Another tax benefit of REITs has recently been gaining prominence. Because a REIT is treated as a corporation for federal income tax purposes, REITs can qualify for tax-free spin-offs. Last week, the IRS released Private Letter Ruling 201436033, in which the IRS held that a REIT could distribute tax-free one of its business segments to its shareholders through a newly formed subsidiary (which would itself elect to be treated as a REIT). This is just one of several recent rulings by the IRS approving such tax-free spinoffs in the law two years, and illustrates yet another tax benefit of using a REIT structure.

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