In recent years, the US Internal Revenue Service has considerably expanded the categories of real estate assets that may be owned by a real estate investment trust (a “REIT”). This expansion of qualifying or “REIT-able” assets, along with liberalization of the rules governing “taxable REIT subsidiaries” (“TRSs”) (which are corporate subsidiaries of REITs that operate businesses and hold assets that are not REIT-eligible), has encouraged many “C” corporations to convert to REITs.

Background on REITs -

A REIT is an entity with special tax status under US federal income law. The REIT tax rules were enacted to promote and facilitate widely-held investment in portfolios of real estate. A REIT has a hybrid tax treatment. From an investor’s tax perspective, a REIT is a separate taxable entity. Unlike an investor in a flow-through entity (such as a partnership), an investor in a REIT generally only is taxed on dividends paid by the REIT and on gains on the disposition of shares in the REIT. Tax-exempt and non-US investors also are not directly taxed on the REIT’s underlying income. From the entity’s tax perspective, the REIT is allowed a “dividends paid deduction” so that it generally is not subject to US corporate tax provided that each year it distributes to its shareholders an amount at least equal to its annual taxable income.