U.S. lawmakers have rewarded real estate investors with a package of tax changes that will simplify the rules that govern the booming real estate investment trust industry.
Overall, the changes should make real estate investment trusts, or REITs, more efficient and potentially more profitable, according to tax analysts. The tax relief, enacted as part of the new tax-cut law, includes granting REITs more flexibility on asset sales and giving the companies greater authority to offer services to tenants.
The tax relief will provide a boost to an already thriving industry. The REIT market has grown from $9 billion in 1990 to roughly $126 billion at the end of the second quarter, according to the National Association of Real Estate Investment Trusts.
Real estate investment trusts are unique corporate structures that don’t pay corporate taxes if, among other things, the companies distribute at least 95 percent of their annual taxable income to shareholders as dividends.
Under the new rules, real estate trusts will have greater flexibility to sell short-term properties. The tax law will remove a limit that bars a company from earning more than 30 percent of its annual income from properties it has held less than four years.
The operators of REITs also will be able to offer the tenants of their buildings some new services. Currently, if a REIT offers any service that isn’t directly tied to the real estate industry it could potentially lose its special tax status, according to Tony Edwards of NAREIT.
“If a REIT that operates a retail mall provides wheelchairs to the customers of the retail tenants … the entity’s very status as a REIT could be placed in jeopardy,” Utah Republican Sen. Orrin Hatch, a primary sponsor of the legislation, said earlier this year.
Next year, a REIT can generate up to 1 percent of its gross income from new services.
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