4 October 2024 • 1 minute read

REIT Tax News - October 2024

Welcome to the October 2024 issue of REIT Tax News. Below, we take a look at five developments to read about in less than five minutes.

Loper Bright standard takes hold in Varian Medical case

In the landmark case of Loper Bright v. Raimondo, the Supreme Court transferred deference in interpreting statutory ambiguity from federal agencies to the courts. Recently, the Tax Court applied this new standard in Varian Medical Systems Inc. v. Commissioner, holding that the US Treasury Department, through its regulations, overstepped its bounds by “impermissibly attempt[ing] to change an unambiguous provision of the [Section 78 dividend] statute.” This ruling highlights the immediate impact of the Loper Bright decision on how courts are approaching disputes involving the IRS and other agencies, particularly in cases where the legitimacy of regulatory interpretations is challenged. For more on Loper Bright, see our client alert.

Elizabeth Warren urges the IRS to increase scrutiny on REITs

On August 26, 2024, IRS Chief Counsel Marjorie Rollinson issued a stern warning in a letter to the Chairman of the Senate Finance Committee. She emphasized that any taxable REIT subsidiary leasing a qualified lodging facility from a REIT and indirectly operating such a facility could cause the REIT to lose its tax status. Days later, on September 3, 2024, Senate Finance Committee Member Elizabeth Warren echoed these concerns in a letter, urging the IRS to intensify scrutiny of REIT practices, particularly in the healthcare and hotel sectors. These communications may signal a potential shift towards stricter enforcement and possible legislative reforms, carrying significant implications for hospitality and healthcare REITs, their investors, and the broader real estate market.

IRS issues private letter ruling on clean energy assets to REMIC

In a significant development, the IRS clarified in a recent private letter that a C-PACE (Commercial Property Assessed Clean Energy) asset is an obligation secured by an interest in real property under Section 860G(a)(3) of the code, thereby effectively broadening the range of assets that can be included in the pool of “qualified mortgages” a REMIC (Real Estate Mortgage Investment Conduit) may claim. A C-PACE is created when a commercial property owner receives funds for a qualifying improvement, and agrees to a special property tax assessment to pay back the funds with interest. While not directed to a REIT, the logic of the private letter ruling suggests similar favorable treatment for REITs from the IRS. See PLR 202429003.

Revised IRM on FIRPTA and REITs

The IRS has updated the Internal Revenue Manual (IRM) on the Foreign Investment in Real Property Tax Act (FIRTPA) withholding, clarifying certain calculations for the maximum withholding tax. Notably, the IRS has not updated the section describing the controversial new domestically controlled REIT rules under recently adopted Treasury Regulations. See IRM 21.8.5 – Miscellaneous FIRPTA Related Issues.

Presidential discussions of REIT tax-related updates

President Joe Biden’s Fiscal Year budgets have advocated for increasing the corporate income tax rate from the current 21 percent, established during the Trump Administration, to 28 percent. As the Democratic Party’s 2024 presidential nominee, Vice President Kamala Harris supports this proposed 28 percent rate, and is expected to further endorse additional tax changes outlined in the Biden budgets. These include proposals such as terminating like-kind exchange transactions, and disallowing prison facility rent payments from counting towards REIT qualifications. In contrast, former President Donald Trump has proposed making key elements of the Tax Cuts and Jobs Act (TCJA) permanent, such as extending Section 199A, which offers a 20 percent deduction on qualified REIT dividends. These contrasting tax strategies will likely have significant implications for businesses and investors alike.