New Guidance for REITs = New Opportunities for Taxpayers

Finally! New Regs on the Horizon for REIT Conversions

A year ago we discussed the attempt by Lamar Advertising and Iron Mountain to convert many of their income generating properties into Real Estate Investment Trusts or REITs. When we of REITs, most people think of investment companies that own office buildings, hotel properties and shopping centers. But why not billboards (Lamar Advertising) or storage units (Iron Mountain)?

Why not? Because the IRS has not been very forthcoming with guidance. Most folks wanting to spin off non-conventional property into a REIT had to seek a private letter ruling from the IRS. No more.

REITs have been with us for over 50 years. Congress enacted section 856 of the Internal Revenue Code in 1960 to allow people to invest in large real estate projects. Using REITs saves taxes and allows investors to pool their money together.

Legally, to qualify as a REIT, the trust must distribute 90% of its taxable income to investors. The trust must also have a real estate investment or property rental (75% of its income must come from the sale or rental of real property). The latter requirement has been the subject of some rather creative private letter ruling requests. These include not only billboards but private prisons, casinos and microwave towers.

Earlier this spring, the IRS finally issued proposed new guidance. (The IRS had largely been silent on the topic for many years.) Absent major resistance, there will be a hearing next month and then the regulations will become final.

The current regulations were written in 1962! Since then, the IRS published individual revenue rulings regarding railroad property, permanently installed mobile home units [an oxymoron to be sure], air rights above property and mortgages secured by total energy systems. There have been dozens of other rulings not published.

The new regulations appear to permit more assets to be included in the definition of property for REIT purposes. The new rules address billboards, microwave transmission, cell towers, electrical transmission towers, telephone poles, parking facilities, railroad tracks, pipelines, offshore drilling platforms, storage structures such as silos and oil tanks and wharves. We expect data storage facilities will also be prime candidates for REIT spin offs.

Some folks in Congress believe that a new wave of REIT conversions will further erode the tax base. One of those folks is House Ways & Means Committee Chairman David Camp. His tax reform plan would prohibit further tax-free REIT spinoffs. Thus far, however, his plan has no traction.

Technology is moving at a rapid pace. Given that the IRS has not released guidance on REITs for over 50 years, we expect considerable interest and activity when the rules become final. REITs are one way American businesses can remain competitive. Using the REIT tax structure to avoid double taxation makes good business sense.

The tax lawyers at Mahany & Ertl help businesses and individuals with a wide variety of tax matters. We can help in REIT conversions and other complex tax planning matters. For more information, contact attorney Brian Mahany at brian@mahanyertl.com or by telephone at (414) 704-6731 (direct). All inquiries protected by the attorney – client privilege.

Mahany & Ertl – America’s Tax Lawyers. IRS tax services available worldwide.

This entry was posted on August 8, 2014, 4:21 pm and is filed under Tax. You can follow any responses to this entry through RSS 2.0. Both comments and pings are currently closed.