The Internal Revenue Service (the “IRS”) and Treasury Department have proposed regulations (the “Proposed Regulations”) under Section 856 of the Internal Revenue Code providing guidance for analyzing whether non-traditional real estate assets qualify as real estate assets to a real estate investment trust (“REIT”). The Proposed Regulations are a good development for businesses with non-traditional assets that are considering converting into REITs or considering spinning off assets through REITs. There had been some question in 2013 regarding whether the IRS was considering contracting the categories of non-traditional assets that are qualifying real estate assets. The Proposed Regulations provide welcome guidance on the categories of assets that are qualifying real estate assets and provide factors for analyzing other types of assets. The Proposed Regulations also address the REIT classification of solar assets.
Background on REITs -
A REIT is an entity with special tax status under Sections 856 through 860 of the Internal Revenue Code. The REIT tax rules were enacted to promote and facilitate widely-held investment in portfolios of real estate. A REIT has a hybrid tax treatment. From an investor’s tax perspective, a REIT is a separate taxable entity. An investor in a REIT generally only is taxed on dividends paid by the REIT and on gains on the disposition of shares in the REIT. Tax-exempt and non-US investors also are not directly taxed on the REIT’s underlying income. From the entity’s tax perspective, the REIT is allowed a “dividends paid deduction” so that it generally does not pay US corporate tax, provided that each year it distributes to its shareholders an amount at least equal to its annual taxable income.
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