United States

New regulations imposing tax on spin-offs followed by REIT conversions

Act as backstop to the 2015 post-spin-off REIT conversion restrictions

TAX ALERT  | 

REIT spin-off restrictions and new regulations

Treasury and the IRS have released regulations that backstop real estate investment trust (REIT) restrictions enacted in December 2015. In the past few years, numerous companies spun off real estate assets in tax-free transactions, with the spun off real estate company electing REIT status.

After the spin-offs, these companies often would rent real property from the spun-off REITs. REITs generally do not pay corporate level tax, provided that they pay sufficient taxable dividends to their shareholders.

Congress acted to stop these spin-off transactions in December of 2015, enacting the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). Under the PATH Act, a spin-off involving a REIT generally may qualify as tax-free only if both corporations, the one that was spun off (Controlled) via distribution of its stock, and the one that distributed the stock of Controlled (Distributing), are REITs immediately after the distribution. REITs may also spin off certain taxable REIT subsidiaries. The PATH Act also imposed a 10-year prohibition on making REIT elections for corporations that have been involved in tax-free spin-offs.

New regulations backstop the tax Code’s REIT spin-off restrictions

Treasury and the IRS have issued new regulations (T.D. 9770) that address transactions in which property of a C corporation becomes the property of a REIT. Most importantly, the regulations expressly extend the post-spin-off REIT conversion tax trigger to corporations other than the two directly involved in the spin-off—Distributing and Controlled. Under the regulations, tax is also triggered by REIT conversions by predecessors or successors of these corporations, or by other members of their respective separate affiliated groups.

The new regulations also modify prior regulations, conforming them to other changes made by the PATH Act. The regulations generally are effective June 7, 2016.

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