Tax Matters General In general, a REIT is able to offer publicly traded equity through an IPO without altering the tax treatment of the REIT. The issuer and underwriter will need to perform a substantial amount of due diligence to confirm that the issuer is and will be eligible to be taxable as a REIT, including confirmation that the issuer will satisfy applicable shareholder composition, asset, income, and distribution requirements. If the issuer qualifies as a REIT, its income will typically not be subject to tax at the REIT level to the extent distributed to stockholders. Instead, its stockholders will generally be taxed on amounts distributed by the REIT. Ordinary REIT dividends are usually taxable to domestic stockholders as ordinary income. However, for taxable years prior to 2026, individual REIT stockholders can generally deduct 20% of the aggregate amount of ordinary dividends distributed by a REIT, subject to certain limitations, which reduces the effective tax rate for individuals on the receipt of such ordinary dividends from a maximum federal income tax rate of 37% to a maximum federal income tax rate of 29.6%. As noted above, in order to maintain REIT qualification, a REIT must satisfy several tests regarding the nature and value of its assets. Generally, these tests must be satisfied at the end of each calendar quarter of each tax year of the REIT, subject, in certain circumstances, to a 30-day grace period. At least 75% of a REIT’s assets must consist of “real estate assets” (such as ownership or leasehold interests in real property or mortgages), cash, cash items, and government securities. No more than 20% of the value of a REIT’s total assets can consist of securities of a taxable REIT subsidiary (a “TRS”), which is a wholly owned subsidiary of a REIT that is taxed as a regular C corporation. No more than 5% of the value of the REIT’s assets may consist of the securities of any one issuer, other than a TRS, and a REIT may not hold more than 10% of the voting power or value of the securities of any one issuer (other than a TRS). At least 75% of a REIT’s gross income must be attributable to real property, such as “rents from real property.” In addition, at least 95% of a REIT’s gross income must consist of income items qualifying for the 75% income test, as well as dividends, non-mortgage interest, and gain from sales of stock and securities. Thus, only 5% of a REIT’s gross income can come from categories (such as service income) not qualifying for the 75% or 95% income tests. In general, a REIT must make qualifying distributions equal to 90% of its taxable income in order to maintain its REIT qualification, although in practice, REITs typically distribute in excess of their taxable income. If a REIT engages in a prohibited transaction, the gains from that transaction are subject to a 100% tax. A prohibited transaction is the sale or other disposition of property held primarily for sale to customers in the ordinary course of business, commonly referred to as “dealer” property. REITs can avoid prohibited transactions by ensuring that any potential transactions meet certain “safe harbor” requirements. In the process of converting from a corporation to a REIT, built-in gains with respect to assets transferred from the corporation to the REIT may be subject to tax. The direct or indirect transfer of property by a regular C corporation to a REIT will cause the REIT 23 | 2024 Guide to REIT IPOs and Listing Transactions
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