REIT Tax News - April 2023

Editor’s note

Welcome to the inaugural edition of REIT Tax News, covering REIT tax news from the first quarter of 2023.

These REIT tax news items fall into the following categories: legislative updates, Treasury regulations, Private Letter Rulings, IRS Notices, and tax forms.

One of the most significant REIT tax headlines of this quarter came out just before the new year. On December 29, 2022, the Internal Revenue Service (the IRS) and the Treasury Department surprised the REIT tax community by issuing proposed regulations under section 897 of the Internal Revenue Code of 1986, as amended (the Code), that would significantly modify the interpretation of the definition of a “domestically controlled” REIT. In particular, the proposed regulations would disallow the practice of foreign investors using a foreign-owned domestic corporation to create a domestically controlled REIT which was previously permitted under prior guidance (eg, Private Letter Ruling 200923001 and legislative history of the Protecting Americans from Tax Hikes Act of 2015). In addition, the IRS and the Treasury Department released final regulations regarding the exception for qualified foreign pension funds from taxation under section 897 of the Code.

Due to the widespread use of “domestically controlled” REIT structures and the lack of a grandfathering provision (among other reasons), various taxpayers and tax professionals (including DLA Piper) submitted comments to the Treasury Department and the IRS recommending a full repeal of the proposed regulations or, at the very least, a robust and generous grandfathering mechanism for existing REITs. For a more detailed discussion, please see our client alert.

Another important development in the world of REIT tax was issued on March 9, 2023, when the Treasury Department released its General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals (the Greenbook), which provides detailed explanations of the revenue proposals included in President Joe Biden’s FY2024 Budget. If enacted, most of the tax rate proposals would be effective for taxable years beginning after December 31, 2022, while the long-term capital gains and qualified dividend rate proposals would be effective for capital gains required to be recognized, and dividends received, on or after the date of enactment. Most non-tax rate related proposals in comparison would be effective for taxable years beginning after December 31, 2023.

The Greenbook’s tax proposals are vast in application and, if enacted, would directly affect REITs and their shareholders. In particular, the Greenbook contains a proposal to exclude from both the 95 percent and 75 percent gross income tests any rents received from a prison or detention facility. The exclusion would also apply to rent from any related property a substantial use of which is in connection with punishment, detention, or correction. The amount of bipartisan support in Congress for any of the Greenbook’s proposals is unclear. Nevertheless, we will keep a close eye on Washington as these proposals are sure to garner much commentary and debate over the coming months. For additional discussion, please see below.

In other REIT tax news, the IRS issued several Private Letter Rulings during this quarter. For example, PLR 202304003 offers helpful guidance in the office REIT area relating to parking, amenity space and complimentary modern tenant services. For a more detailed discussion, please see our client alert.

The IRS was also busy from a compliance standpoint, issuing a new Form 8612, Return of Excise Tax on Undistributed Income of Real Estate Investment Trusts. The IRS is requesting comments from taxpayers regarding the Form until April 17, 2023.

Lastly, as a reminder to our readers, Treasury regulations finalized in October 2020 under section 1446(f) of the Code requiring residual withholding on transfers of interests in partnerships (domestic or foreign) with foreign partners came into effect on January 1, 2023. For a more detailed discussion, please see our client alert.

We hope that you enjoy this edition of REIT Tax News.

I. Legislative updates

US Department of the Treasury releases Greenbook, outlining tax proposals to reduce the deficit, expand support for working families, and ensure the wealthy and large corporations pay their fair share. 

“Today, the US Department of the Treasury released the General Explanations of the Administration’s FY2024 Revenue Proposals, or ‘Greenbook,’ a document to explain the revenue proposals included in President Joe Biden’s Budget.” (Treasury Department, March 9, 2023)

The Treasury Department’s press release, and the Greenbook itself, can be found here.

In addition to the prison REIT proposal discussed above in the Editor’s note, the Greenbook contains a number of general tax proposals that would impact REITs and their shareholders:

• Tax rate increases. The table below illustrates the proposed changes to the tax rates applicable to corporations and high-income earners.

• Repeal of certain like-kind exchanges (ie, 1031). Tax deferral under section 1031 of the Code for like-kind real property exchanges would be repealed for gains in excess of $500,000 ($1 million in the case of married individuals filing a joint return).
  
  
• Modification of carried interest. Income attributable to carried interest received from an investment partnership, regardless of the character of the income at the partnership level, would be characterized as ordinary income if the carried interest holder’s taxable income exceeds $400,000. The proposal would repeal the current iteration of Code section 1061 for taxpayers with taxable income exceeding $400,000. The Greenbook, clarifies that this proposed modification is not intended to “adversely affect qualification of a [REIT] owning a profits interest in a real estate partnership.”
  
  
• Sunsetting provisions of the Tax Cuts and Jobs Act of 2017 (TCJA). The Greenbook does not address the impending expiration of certain Code provisions enacted under the TCJA, including Code section 199A, which, inter alia, generally permits noncorporate taxpayers to take a deduction of up to 20 percent of their qualified REIT dividends.
  
  
• Wealth tax. A minimum tax of 25 percent would be levied on an individual’s total income, inclusive of unrealized capital gains, for those taxpayers with more than $100 million in net assets.
  
  
• Electronic filing. All REITs, regardless of size, would be required to file electronic tax and information returns.

II. Treasury regulations

IRS issues proposed regulations impacting the determination of domestically controlled REIT status. 

“On December 29, 2022, the Treasury Department and the IRS published proposed regulations in the Federal Register under Section 897 of the Internal Revenue Code of 1986, as amended, that would significantly modify the interpretation of the definition of ‘domestically controlled’ real estate investment trust status.” (DLA Piper, December 29, 2022)

For a more detailed discussion, please see our client alert.

Tax pros pan proposed look-through rules for domestic REITS. 

“Proposed regulations that would change the treatment of foreign investors’ ownership interests in real estate investment trusts are unwelcome and represent an about-face by the government, according to tax advisers.” (TaxNotes, February 13, 2023)

Available on TaxNotes.

ABA Section of Taxation meeting: retail investors’ benefit is central to domestic REITS overhaul. 

“Proposed regulations that would change the treatment of foreign investors’ ownership interests in U.S. real estate investment trusts were drafted to ensure that the REITs still benefit retail investors, a government official said.” (TaxNotes, February 13, 2023)

Available on TaxNotes.

Housing groups offer input on proposed foreign government exemption regulations.

“Two housing trade groups have argued that Treasury does not have the authority to issue the look-through rule in proposed regulations (REG-100442-22) on the exemption from taxation for foreign governments, but even if it did, the regs are an incorrect interpretation of the statute and conflict with the legislative history and congressional intent.” (TaxNotes, February 24, 2023)

Available on TaxNotes.

Lawyer group asks IRS to scrap look-through approach on REITs. 

“The Internal Revenue Service should withdraw or revamp a proposed change to the standards under which US real estate investment trusts are considered to be ‘domestically controlled,’ the American Bar Association’s Tax Section says.” (Daily Tax Report, March 1, 2023)

Available on Bloomberg Tax. DLA Piper was one of the principal drafters of the American Bar Association’s Tax Section comment letter.

Real estate groups protest look-through rule proposal. 

“A look-through proposal in new Treasury and IRS regulations should be withdrawn because it would ‘rewrite decades of existing tax law, overrule and supersede Congressional intent, and potentially stifle real estate’s access to foreign capital,’ real estate industry groups said in a March 1 letter to taxwriting committee leaders.” (TaxNotes, March 1, 2023)

Available on TaxNotes.

Nix look-through rule in foreign government exemption regulations, groups say. 

“The Real Estate Roundtable and other groups have urged the withdrawal of the look-through rule in proposed regulations (REG-100442-22) on the exemption from taxation for foreign governments, asserting that it is unnecessary and its retroactive effect and unintended consequences threaten to disrupt real estate markets, values, and investment.” (TaxNotes, March 1, 2023)

Available on TaxNotes.

III. Private Letter Rulings

IRS PLR: taxable REIT subsidiary election extension granted. 

“Taxpayer and subsidiary granted extension of time to file Form 8875, Taxable REIT Subsidiary Election, to treat subsidiary as a taxable REIT subsidiary (TRS) of Taxpayer under I.R.C. §856(l) effective as of the date subsidiary was formed.” (Daily Tax Report, January 6, 2023)

Available on Bloomberg Tax.

New REIT tax guidance on parking, amenity space and modern tenant services. 

“The 2023 Private Letter Ruling provides helpful guidance for office REITs. This guidance is especially timely as landlords are creatively offering new amenities and services to attract office tenants to return to physical offices. The 2023 Private Letter Ruling shows a willingness on the part of the IRS to modernize the REIT rules for the new real estate environment.” (DLA Piper, February 23, 2023)

For a more detailed discussion, please see our client alert.

IRS PLR: REIT’s right to receive brownfield credits as an asset under GAAP is a receivable, income attributable to receipt or accrual of credits is qualifying income.

“A real estate investment trust’s (REIT) right to receive brownfield redevelopment tax credits, to the extent the right is an asset under GAAP, is a receivable for purposes of I.R.C. §856(c)(5)(J)(ii), the IRS ruled.” (Daily Tax Report, February 3, 2023)

Available on Bloomberg Tax.

IRS PLR: consent granted for taxpayer to be treated as if REIT election were not made.

“Consent granted for Taxpayer to be treated as if it had not made an election to be a real estate investment trust (REIT) on its Form 1120-REIT, US Corporation Income Tax Return for REITs, inadvertently filed for a certain taxable year, the IRS ruled.” (Daily Tax Report, February 3, 2023)

Available on Bloomberg Tax.

IV. IRS Notices

IRS Notice: comment request on excess inclusion income taxation, reporting by REITS, and other pass-through entities.

“Comments requested on Notice 2006-97, which requires certain real estate investment trusts (REITs), regulated investment companies (RICs), partnerships and other entities that have excess inclusion income to disclose the amount and character of such income allocable to their record interest owners, the IRS provided Jan. 9.” (Daily Tax Report, January 9, 2023)

Available on Bloomberg Tax.

V. Tax forms

IRS form: excise tax return on undistributed REIT income comments requested.

“Comments requested on Form 8612, Return of Excise Tax on Undistributed Income of Real Estate Investment Trusts, which is used by REITs to compute and pay excise tax on undistributed income under I.R.C. §4981.” (Daily Tax Report, February 15, 2023)

Available on Bloomberg Tax.

Contacts

To learn more, please contact any of the following REIT tax practitioners at DLA Piper:

Jesse A. Criz, Allen P. Ashley, Shiukay Hung, Jeffrey P. Zanchelli, Aalok Virmani, Emily J. Snyder, Gregory R. A. Dahlgren, Katie LaKoma, James Manzione, Joshua Lingerfelt, Maximilian Viski-Hanka, Kentaro Murase, Matthew Hilowitz, Keith Stiggers, Jennifer Saperstein, and Allan Bowen.

Please check out this snapshot of each of our team members.

About DLA Piper’s National REIT Tax practice

DLA Piper’s National REIT Tax practice has in-depth knowledge and experience with US-listed public REITs, Singapore-listed public REITs, non-traded public NAV REITs, and private REITs. We advise on the acquisition, disposition, and operation of real estate assets through fund, REIT, and joint venture vehicles. Our attorneys are recognized as industry leaders and regularly publish articles in legal and trade publications and actively participate in real estate and REIT industry organizations.