A Real Estate Investment Trust ("R.E.I.T.") is an entity that generally owns and typically operates a pool of income-producing real estate properties, including mortgages. R.E.I.T.'s are generally a popular type of investment vehicle. Their investors look to a return on investment in two forms: (i) distributions from the R.E.I.T. and (ii) dispositions of the R.E.I.T. stock.
Essentially, R.E.I.T.'s do not pay corporate-level tax because they are required to distribute 90% of their income to shareholders. However, in order to enjoy this and other tax benefits under the Code, these entities must meet extremely stringent conditions to qualify as a R.E.I.T.
Many R.E.I.T.'s have their stock registered and traded on a stock exchange. These are referred to as publicly traded R.E.I.T.'s, which are granted tax incentives for foreign investors. Other types of R.E.I.T.'s and certain types of investors are also eligible for other favorable tax rules.
These beneficial rules were enhanced by the Protecting Americans from Tax Hikes Act ("P.A.T.H. Act") that was signed into law by President Obama in December 2015 and were left untouched by the Tax Cuts and Jobs Act ("T.C.J.A.") signed by President Trump in December 2017. As a result, under certain facts, some foreign investors can invest in a R.E.I.T. on a completely tax-free basis, both with respect to distributions received from the R.E.I.T. and with respect to the disposition of the R.E.I.T. stock.
TAXATION OF FOREIGN INVESTORS IN A U.S. R.E.I.T.
Taxation of R.E.I.T. Distributions
Distributions from a R.E.I.T. are generally designated as either "ordinary dividends" or "capital gain dividends." Certain distributions, or a portion thereof, may be treated as return of capital.
Typically, this treatment is a result of R.E.I.T. deductions, specifically (i) depreciation deductions, which generally were expanded and extended under the T.C.J.A., and (ii) interest expense deductions, which were limited under the T.C.J.A. (albeit R.E.I.T.'s, like other real estate businesses, are allowed to elect out of this limitation at the cost of losing some accelerated depreciation).
Ordinary dividends are attributable to earnings that are derived from ordinary income of the R.E.I.T., such as rents and mortgage interest. For foreign investors, ordinary dividends are treated as a Fixed or Determinable, Annual or Periodic ("F.D.A.P.") payment and are generally subject to 30% U.S. Federal withholding tax.
The withholding tax rate may be reduced or eliminated under an applicable income tax treaty. Typically, treaties restrict the benefit available to ordinary dividend income when the dividend is paid by a R.E.I.T.
The table below highlights some of the treaties under which a reduced rate is available, the type of treaty country resident that may be eligible for the reduced rate, and other general requirements that must be met (in addition to any limitation on benefits provision requirements):
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