FAQ Real Estate Investment Trust Morrison Foerster | 19 investors. Special considerations can apply when direct or indirect stockholders are tax-exempt. How do private REITs comply with the ownership and holder requirements? If there are no willing “friends and family,” there are companies that provide services to help a private REIT fulfill the 100 stockholder requirement. They may also provide administrative services relating to the ownership and holder requirements, such as maintaining the stockholder base, creating and maintaining all stockholder records and keeping track of the ownership changes. Tax Matters What are the tax benefits of qualifying as a REIT? The primary tax benefits of qualifying as a REIT are: (1) the REIT generally is not subject to tax on its income and gain to the extent it annually distributes all such income and gain (as a result of the dividends paid deduction to which a REIT generally is entitled upon the payment of dividends); and (2) non-corporate stockholders of a REIT generally are entitled to a 20% deduction on ordinary dividends received from a REIT. How is REIT status elected? A REIT election is made by filing a tax return on a Form 1120-REIT for the first year for which REIT status is desired (if an extension is filed, the extension must indicate that REIT status will be elected). How is REIT status lost or revoked? REIT status is lost if there is a failure to meet one or more of the REIT requirements (described below), and no exception to disqualification or ability to cure such failure is available. REIT status also can be revoked voluntarily by filing a statement to that effect with the IRS, provided such revocation occurs on or before the 90th day of the taxable year for which the revocation is to be effective. What are the consequences of losing or revoking REIT status? For any taxable years for which REIT status has been lost or revoked, the entity will be subject to tax as a domestic corporation. Additionally, the entity (and certain successor entities) may not re-elect REIT status until the fifth taxable year after which REIT status was lost or revoked (unless, in the case of a loss of REIT status, such loss was not due to willful neglect or fraud). What are the REIT asset test requirements and restrictions on ownership of securities? The REIT asset tests (including the REIT securities ownership restrictions) are tested as of the last day of each calendar quarter of the REIT’s taxable year (March 31, June 30, September 30, and December 31). A REIT that is a partner in a partnership generally will be treated as owning its proportionate share of the assets of the partnership based on the REIT’s capital interest in the partnership. ▪ Real estate asset requirement – At least 75% of the gross value of the REIT’s assets must consist of interests in real property, mortgages, shares in other qualified REITs, debt instruments of publicly offered REITs, cash and cash equivalents, government securities and certain receivables. REITs also may own certain stock and debt acquired with certain new capital for the first year after such capital was obtained, which assets will qualify as “good” assets for purposes of the 75% test. ▪ Securities ownership restrictions – A REIT may not own the following securities (generally excluding securities that do qualify for purposes of the 75% asset test): (i) securities of TRSs that represent more than 20% of the value of the REIT’s total assets; (ii) securities (other than securities of a TRS) that represent more than 10% of the value or vote of any issuer (other than, in the case of value only, certain specific securities, including “straight debt,” individual debt and rent receivables); and (iii) securities (other than securities of a TRS) of any one issuer representing more than 5% of the value of the REIT’s total assets. Additionally, not more than 25% of the REIT’s total assets may consist of debt (other than mortgages) of publicly offered REITs (which otherwise qualify under the REIT 75% asset test). ▪ Asset values and subsequent changes in asset values – REITs use various methods to determine the values of their assets under
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