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:

1. 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. 
   
   
2. 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.
   
   
3. 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.

* 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

IRS MEMORANDA AND PRIVATE LETTER RULINGS

LET’S CONNECT 

PUBLICATIONS

READ MORE

Listen to an interview with Shiukay Hung at Nareit’s REITwise 2024 Conference.

MEET THE TEAM

About AKD Partners’s National REIT Tax practice