New Tax Workaround Comes in the Form of REITs
The IRS has recently been cracking down on corporate entities that try to dodge taxes by moving assets offshore. But a new IRS ruling opened the door to a different kind of tax savings vehicle that some corporations may find to be a better alternative.
A real estate investment trust, known as an REIT for short, is a publically traded entity that typically owns malls, hotels, commercial buildings or other types of property. A mortgage REIT owns bundles of loans. REITs have favorable tax treatment: the entities pass on 90 percent of their income untaxed to shareholders, and the shareholders then must pay taxes on the income. REITs thus have very little taxable income.
To qualify as an REIT, a company must derive at least 75 percent of its income from interest on real estate sales or financing or from property rents; in addition, at least 75 percent of the company’s assets must consist of real estate. Now, these qualifications sound somewhat difficult to meet. However, the recent IRS ruling broadened the definition of what can be considered “real estate.”
Under the new rules, in addition to the traditional conception of real estate in the form of inherently permanent structures, real estate for the purposes of forming an REIT can include cell and broadcast towers, microwave transmissions, pipelines, railroad tracks, storage facilities, parking facilities, transmission lines, bridges, and tunnels. Does this new ruling mean that all companies will be able to take advantage of tax savings by forming an REIT? Certainly not. But it does greatly expand the range of entities that may be able to create REITs.
Source:The New York Times, “A Corporate Tax Break That’s Closer to Home,” Gretchen Morgenson, Aug. 9, 2014
