Tax Reform Act of 2014

Ways and Means Committee Draft

Summary Analysis

“Congress Declares War on REIT Conversions”

The House Ways and Means Committee initiates tax proposals for Congress.  Proposals made in the recent draft can be described as having a potentially significant impact on REITs and commercial real estate investment, and on REIT conversions in particular.

Important takeaways:

Commercial Real Estate:

Like-Kind Exchanges:

-          - Repeal of Section 1031 of the Tax Code - Like-Kind Exchanges.  This would result in a reduction in the number of commercial real estate transactions.

REITs

Taxable REIT Subsidiaries:

-          - REIT ownership in a TRS would now be limited to 20% (as a percentage of the REITs assets), reduced from 25% ownership.  This would inhibit REITs from investing in ancillary businesses that do not have qualifying REIT income.

Conversions:

-          - Non-Qualifying Assets / Property Types 

o   Non-traditional property sectors – defined as those with an accounting life of less than 27.5 years – will no longer qualify for REIT status.  (A proposal on Timber assets is addressed separately in the proposal.)  This appears to have been proposed in conjunction with the IRS.

-          - Special Dividends/Distributions upon Conversion

o   Pre-conversion distributions would have to be made in cash.  Stock distributions, postponing tax liability and preserving cash, would not be permitted.  

-          - Tax on Conversions from C Corp to REIT         

                 o  It appears that the committee is proposing that REITs will have to write up their                  assets (mark to market) before a conversion to REIT status can take place.