REIT Tax News - April 2024
Welcome to the April 2024 issue of REIT Tax News. Below, we take a concise look at five developments to read about in less than five minutes and other recent updates.
1. Reduced withholding tax rates for Chilean investors (and maybe Taiwanese investors, too)
Entering into force on December 19, 2023, the US-Chile Bilateral Tax Treaty is only the second income tax treaty that the US has created with a South American country and would provide a reduced rate of withholding of 15 percent for qualified REIT dividends.
The following month, Congressman Jason Smith introduced H.R. 7024 (the Tax Relief for American Families and Workers Act of 2024). H.R. 7024 would provide tax incentives similar to an income tax treaty to Taiwanese residents by reducing withholding taxes on US-sourced income, including by reducing the rate of withholding on qualified REIT dividends to 15 percent. There is currently no income tax treaty between the US and Taiwan.
2. Corporate tax rate increase coming soon?
In the State of the Union address on March 7, 2024 and a related published statement, President Joe Biden proposed to increase the corporate tax rate to 28 percent and the corporate minimum tax to 21 percent. In addition, the Treasury Department released its General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals (the Greenbook) on March 11, 2024, which provides detailed explanations on President Biden’s proposed corporate tax rate changes and other revenue proposals included in President Biden’s FY2025 Budget.
3. IRS transfer pricing guidance for intercompany debt
The IRS published an IRS Chief Counsel Memo on transfer pricing that indicates the IRS could take into account implicit credit support for related party debt. For more information on the impact of this guidance on so-called “leveraged blocker” structures used frequently in connection with fund and real estate investments, please see our client alert.
4. REIT private letter rulings (PLRs) on government incentives
The IRS issued several private letter rulings this quarter, including the following:
- State incentive financing: The IRS held in PLR 202405001 that payments to a REIT received from a local government in the form of property and occupancy tax financed bond payments and reimbursement incentives received from a state agency will be either qualifying REIT income for purposes of the 75-percent income test or the 95-percent income test. Please see our client alert for additional guidance.
- Brownfield credits: Consistent with previous state brownfield redevelopment credits private letter rulings, the IRS held in PLR 202409002 that (a) the right to receive brownfield credits (to the extent the right is an asset under generally accepted accounting principles, or GAAP) constitutes a receivable for purposes of the 75-percent asset test under Code Section 856(c)(4) and, (b) pursuant to its discretionary authority under Code Section 856(c)(5)(J)(ii), the gross income attributable to the receipt or accrual of such brownfield credits constitutes valid REIT income for purposes of the 95-percent and 75-percent income tests under Code Section 856(c)(2) and (3). However, the IRS declined to rule on whether income generated from the sale of the carbon offsets (due to appreciation in value between generation and sale) would be treated as qualifying income, and the taxpayer represented that it would treat any income from the sale of the carbon offsets as non-qualifying income.
- Oil and gas pipelines: The IRS held in PLR 202410005 that fees received from a third party’s use of a taxpayer’s oil and gas pipelines qualify as rents from real property for purposes of Code Sections 856(c)(2) and (3). The IRS declined to rule on whether the taxpayer qualified as a REIT, whether any of its assets were real property for purposes of Code Section 856, and whether any income attributable to personal property leased in connection with real property exceeded 15 percent of the total rent under Code Section 856(d)(1)(C).
5. Should REITs be included as a member of a regulated financial group?
The Treasury Department and the IRS jointly proposed amending Treasury Regulation Section 1.166-2 so that a “regulated financial company” or a member of a "regulated financial group” can conclusively presume a debt is worthless when it makes a “charge-off” of the debt on its applicable financial statement. However, REITs are specifically excluded as members of a regulated financial group. According to the American Bankers Association, many banks use “consolidated REITs” (REITs that are consolidated with the bank for GAAP purposes) to hold real estate investments. This exclusion would remove the benefit of the new rule for real estate loans for those banks. Read a summary of the proposal here.
LEGISLATIVE UPDATES
H.R. 7024 would enhance child credit, provide Taiwan tax relief
H.R. 7024, or the Tax Relief for American Families and Workers Act of 2024, increases the refundable portion of the child tax credit in an effort to compensate for high inflation rates. The measure provides tax incentives to Taiwanese residents by reducing withholding taxes for US-sourced income, including by reducing the withholding rate on qualified REIT dividends to 15 percent. Furthermore, the bill expands executive branch power by equipping the president with authority to renegotiate and enter into an amended US-Taiwan tax agreement. While H.R. 7024 was passed by the House of Representatives 357 to 70 on January 31, 2024, it has not yet passed the Senate, and it is unclear whether it will pass in its current form or whether further negotiations will be required.
Read the summary of current and proposed law prepared by the Joint Committee on Taxation here.
US-Chile Treaty
The US-Chile Bilateral Tax Treaty, which entered into force on December 19, 2023, reduces taxes stemming from cross-border investment to create more cost-efficient business opportunities. Notably, it would eliminate or reduce double taxation implicated by cross-border sourced income. Under the treaty, qualified dividends paid by a real estate investment trust (REIT) to a resident of Chile are eligible for a 15-percent rate under certain circumstances.
Read the full text of the bill here.
President Biden proposes raising corporate tax rates
“Raising the corporate tax rate to 28% and the corporate minimum tax to 21%. President Biden believes large corporations should pay their fair share, and is committed to reversing the massive tax giveaway to big corporations that Republicans enacted in 2017. President Biden would raise the corporate tax rate to 28%. He would also ensure that billion-dollar corporations pay at least 21% of their income in taxes, building on the Inflation Reduction Act’s (IRA) corporate minimum tax.” (White House, March 7, 2024)
Read the White House’s released summary.
US Department of the Treasury releases Greenbook, outlining tax FY2025 tax proposals, including excluding prison rents as qualifying income
The Greenbook contains a number of general tax proposals that would impact REITs and their shareholders:
Read the Greenbook here.
- Prison REITs: The Greenbook would 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. This same proposal was included in last year’s Greenbook, and a summary is included here on page 20.
- Conform scope of portfolio interest exclusion for 10-percent shareholders: The Treasury proposed amending the portfolio interest exclusion for 10-percent shareholders to eliminate certain high-vote/low-vote tax planning strategy that limits shareholder voting power to below 10 percent. The proposal redefines a 10-percent shareholder as one who “owns 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote or 10 percent of the total value of shares of all classes of stock of such corporation.” (Treasury Department, March 11, 2024)
- Tax rate increases: The table below illustrates the proposed changes to the tax rates applicable to corporations and high-income earners.
|
|
Current law |
Greenbook rate |
|
Ordinary income tax rate |
37 percent for incomes over $578,126 ($693,750 for married couples filing jointly) |
39.6 percent ($450,000 for married individuals filing a joint return and surviving spouses) |
|
Long-term capital gains/qualified dividend tax rate |
20 percent for incomes over $518,900 ($583,750 for married couples filing jointly) |
37 percent (or 40.8 percent) for incomes above $1 million ($500,000 for married filing separately) |
|
Net income investment tax rate |
3.8 percent on the amount equal to the lesser of (i) the taxpayer’s net investment income, or (ii) income above $200,000 ($250,000 for married couples filing jointly)
|
5 percent on the amount equal to the lesser of (i) the taxpayer’s net investment income, or (ii) income above $400,000 |
|
Corporate tax rate |
Flat 21 percent on all income |
Flat 28 percent on all income |
* This table is not intended to provide a complete description of all the current or proposed tax rates and brackets.
- Tax carried interests as ordinary income: 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. This proposal was also previously included in FY2024’s Greenbook.
- Wealth tax: A minimum tax of 25 percent would be levied on an individual’s total income, inclusive of unrealized capital gains, for taxpayers with more than $100 million in net assets. This proposal was also previously included in FY2024’s Greenbook.
- Electronic filing: All REITs, regardless of size, would be required to file electronic tax and information returns. This proposal was also previously included in FY2024’s Greenbook.
TREASURY REGULATIONS
Proposed Regulation Section 1.166-2(d)
Code Section 166(a) provides a deduction for wholly or partially worthless debts. Code Section 166, however, does not provide a definition for “worthless.” As mentioned above, the Treasury Department and the IRS proposed to amend Treasury Regulation Section 1.166-2 so that a “regulated financial company” or a member of a "regulated financial group” can conclusively presume a debt is worthless when it makes a “charge-off” of the debt on its applicable financial statement. A regulated financial company includes banks and regulated insurance companies, and a regulated financial group is one or more chains of corporations with a common parent that is a regulated financial company. However, REITs are specifically excluded as members of a regulated financial group. According to the American Bankers Association, many banks use “consolidated REITs” (ie, REITs that are consolidated with the bank for GAAP purposes) to hold real estate investments. As such, this exclusion would arbitrarily remove the benefit of the new rule for real estate loans for those banks.
Read the summary of the proposed regulation here.
IRS MEMORANDA AND PRIVATE LETTER RULINGS
IRS ramps up new initiatives for large corporations, complex partnerships, and high-wealth individuals for unpaid debts via the Inflation Reduction Act
Backed by increased funding, the IRS has announced plans to ramp up audits of the 76 largest partnerships using artificial intelligence assistance. The IRS has also announced that it is using data analytics to identify large corporate taxpayer for audit. Many REITs either operate through an UPREIT structure in which they hold all, or substantially all, of their assets through a partnership and may be impacted by increased scrutiny of large partnerships. It is unclear from the announcement whether REITs will be included in the increased scrutiny of large corporate taxpayers. The Inflation Reduction Act has revamped the IRS’s enforcement efforts, allowing the agency to keep “pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income.” (Internal Revenue Service, January 12, 2024)
Available on IRS.gov.
IRS PLR 202405001: Bonds and construction reimbursements may be qualifying income
The IRS held that payments to a REIT received from a local government in the form of property and occupancy tax financed bond payments and reimbursement incentives received from a state agency will be either qualifying REIT income for purposes of the 75-percent income test or the 95-percent income test. Please see our client alert describing the impact of the IRS ruling in greater depth.
Available on IRS.gov.
IRS PLR 202410005: Fees generated from oil and gas pipelines qualify as rents from real property
The IRS ruled that fees generated through arrangements with unrelated third-party users of the taxpayer’s oil and gas pipelines qualify as rents from real property for purposes of Code Section 856(c)(2) and (3). The IRS declined to rule on whether taxpayer otherwise qualifies as a REIT under part II of subchapter M of Chapter 1 of the Code. The IRS also specifically did not rule on whether any assets are real property for purposes of Code Section 856 or whether any income attributable to personal property leased in connection with real property exceeds 15 percent of the total rent under Code Section 856(d)(1)(C).
Available on IRS.gov.
IRS PLR 202401011: Carbon offset credits are qualifying income
The IRS ruled that income generated by a taxpayer from the issuance of carbon offset credits is qualifying income for purposes of Code Sections 856(c)(2) and (3).The IRS declined to rule on whether income generated from the sale of the carbon offsets (due to appreciation in value between generation and sale) would be treated as qualifying income, and the taxpayer represented that it would treat any income from the sale of the carbon offsets as non-qualifying income. The IRS specifically did not rule on whether sales would be prohibited transactions. The IRS made this ruling pursuant to its authority under Code Section 856(j), and therefore, other timber REITs may want to get their own ruling as opposed to if the IRS had ruled that such income is generally qualifying.
Available on IRS.gov.
IRS PLR 202409002: REITs right to receive brownfield credits treated as qualifying assets and income
The IRS held that a REIT’s right to receive state brownfield credits from the remediation, rehabilitation, or development of certain property constitutes a qualifying asset, and the income therefrom constitutes qualifying income, as applicable, for purposes of the “asset” and “income” tests under Section 856.
Available on IRS.gov.
IRS AM 2023-008: The importance of transfer pricing analysis in leveraged blockers used by foreign investors
The IRS memo “highlights the importance of having appropriate transfer pricing analyses to support intercompany financing arrangements. In the real estate and investment funds industry, foreign investors frequently use leveraged blockers to passively invest in US investments that are structured as US partnership.” This suggests that the “IRS could take the credit worthiness of a foreign investor into account along with other entities in a real estate or investment fund structure to determine the credit rating of the leveraged blocker. In the case of leveraged blockers shared by sovereign wealth funds or qualified foreign pension funds with trillions of assets, this interpretation could materially decrease the rate of borrowing of the intercompany loan extended by the foreign shareholders to the blocker.” (DLA Piper, January 24, 2024)
Available on IRS.gov. See also our client alert here.
LET’S CONNECT
Below, please find a list of upcoming events that our team is attending. If you are in the area, we would love to connect.
Nareit’s REITwise: 2024 Law, Accounting & Finance Conference, March 19–21, 2024
DLA Piper was a proud supporter and sponsor of Nareit’s REITwise conference held March 19–21. Notably, DLA Piper Partner Shiukay Hung spoke during the “Intro to REIT Taxation” session, which focused on REIT income and asset tests, UPREITs, permissible and impermissible tenant services, energy tax credits, and REITs.
A recap of the conference is included here.
IPA Summit 2024, "The Keys to International Capital – Global Horizons – Unlocking the Keys to Foreign Capital for Real Estate and Private Credit,” May 1–3, 2024
Later this spring, Shiukay Hung will participate in a panel discussion, entitled, “The Keys to International Capital – Global Horizons – Unlocking the Keys to Foreign Capital for Real Estate and Private Credit” on May 1, 2024. The panel will provide a comprehensive discussion on how non-listed REITs and business development companies (BDCs) can tap into foreign capital sources.
The conference agenda and registration information can be found here.
2024 ABA May Tax Meeting, “Distressed REITs,” May 2–4, 2024
Also in May 2024, Shiukay Hung will speak in a panel discussion, entitled, “Distressed REITs,” on May 3, 2024. This panel will discuss certain issues faced by REITs in a challenging market, including cash management, debt restructuring, receivership, and bankruptcy.
The conference agenda and registration information can be found here.
Strafford, “Tax Treatment of Leveraged Blockers Used by Foreign Investors: Recent IRS Guidance, Deal Structures, Tax Planning,” June 2024
In a webinar the following month, DLA Piper Partner Aalok Virmani and Shiukay Hung will discuss structuring strategies and tax considerations for foreign investors in US assets using leveraged blockers and other tax planning mechanisms. The panel will discuss recent IRS guidance, key tax considerations in structuring deals involving foreign investors, transfer pricing analysis, and other key items.
Please email a member of the DLA Piper team if you are interested in receiving a complimentary pass to attend this webinar.
Webinar and registration information can be found here.
PUBLICATIONS
The AFIRE Guide to US Real Estate Investing: What Global Investors Need to Know about Commercial Real Estate Acquisition, Management, and Disposition, McGraw Hill, 2023
Shiukay Hung was a contributing author to the recent publication of the 4th edition of McGraw Hill’s The AFIRE Guide to US Real Estate Investing: What Global Investors Need to Know about Commercial Real Estate Acquisition, Management, and Disposition.
The publication can be found here.
READ MORE
Access our REIT Tax Resource Center.
Listen to an interview with Shiukay Hung at Nareit’s REITwise 2024 Conference.
MEET THE TEAM
To learn more about DLA Piper’s National REIT Tax practice, please contact any of our REIT tax attorneys. Please view this snapshot of our team.
About DLA Piper’s National REIT Tax practice
Our attorneys are recognized as industry leaders by Chambers and The Legal 500, regularly publish articles in legal and trade publications, and actively participate in real estate and REIT industry organizations.
