REITs: Meeting Qualification Rules, Taxable REIT Subsidiaries, and Exit Strategies

Description

There are two primary types of REITs: equity and mortgage. The former generates income from rents and the sale of properties, while the latter invests in mortgages secured by commercial or residential properties.

For investors, the benefits of these vehicles include receipt of considerable dividends and significant capital appreciation. The Tax Act of 2017 made REITs even more appealing by lowering the tax rate on corporations to 21 percent and allowing taxpayers a 20 percent deduction for qualified REIT dividends under 199A.

Although the benefits are extensive, the requirements can be overwhelming:

• At least 75 percent of its total assets must be invested in real estate
• At least 90 percent of its taxable income must be paid in dividends
• Have no less than 100 shareholders with no more than 50 percent of its shares being held by five or fewer individuals
• Be taxable as a corporation

These are a few of many obstacles to a REIT designation. Compliance with the requirements is an ongoing process, and failing any tests may jeopardize an entity's REIT status. Tax practitioners must understand both the benefits and caveats of working with these entities.

Listen as our panel of REIT experts explains the rules for REIT qualification, meeting quarterly and annual requirements, the consequences of failing REIT tests, and successfully exiting a REIT.