Taxable REIT Subsidiary Benefits and Rules

A Taxable REIT Subsidiary is a separate entity from its parent REIT, allowing it to engage in taxable activities such as real estate development or property management.

This structure provides a range of benefits, including the ability to hold non-income-producing assets, such as land or development projects, without affecting the parent REIT's tax status.

A Taxable REIT Subsidiary can also be used to hold assets that would otherwise be considered prohibited transactions for a REIT.

By separating these activities from the parent REIT, a Taxable REIT Subsidiary can provide a more flexible and efficient way to manage assets and conduct business.

A TRS, or Taxable REIT Subsidiary, is a subsidiary that allows a REIT to provide services beyond what's customarily furnished in connection with the rental of real property.

The key benefit of a TRS is that it allows a REIT to pass the income test, which requires that more than 75% of the corporation's gross income be derived from passive real estate investments.

A TRS is a taxable entity, which means it's subject to corporate tax rates.

This allows a REIT to provide additional services to its tenants without jeopardizing its tax status.

A TRS election is a crucial step for a REIT and its corporation subsidiary. To make a TRS election, the REIT and corporation must jointly file IRS Form 8875.

The effective date of the election must occur within a specific time window: no more than 45 days before the filing, and no more than 12 months after the filing. If a REIT acquires more than 35% of another corporation, the IRS will consider the target corporation to be a TRS.

The TRS election is generally irrevocable, but both the REIT and TRS can revoke the election by filing a new Form 8875 with written consent. This can be a costly and time-consuming process, so it's essential to consider the implications carefully.

Here are the key deadlines to keep in mind:

If a TRS acquires more than 35% of another corporation, the acquired corporation is also considered a TRS, and the REIT and existing TRS must file an updated copy of Form 8875.

A Taxable REIT Subsidiary (TRS) can own a hotel or healthcare asset, but it must lease the property to a third party or its subsidiary, which engages an eligible independent contractor (EIK) to operate the property.

To avoid losing TRS status, a hotel or healthcare asset must be managed by a TRS through an EIK. This EIK must be in the business of managing unrelated health care or hotel properties, and there's no "bright line" for how many properties are required.

A TRS can provide non-customary services to tenants of the REIT's property without disqualifying the amounts received by the REIT from treatment as rents from real property. This includes services like housekeeping, telecommunications, and management services.

A TRS can also provide services to third parties that are unrelated to the REIT. In one example, a TRS entered into a partnership with an unrelated corporation that qualified as an independent contractor and provided non-customary services to tenants of the REIT's properties.

Here are some key points to keep in mind:

A TRS is subject to regular corporate income tax, whereas a QRS is not separately subject to federal income tax.

A TRS can be a wholly owned subsidiary of a REIT, but it's not the same as a QRS.

A QRS is a corporation that is always wholly owned by the REIT and is disregarded for federal income tax purposes.

The direct attributes of a QRS are deemed to be owned by the REIT for tax purposes, making it easier to meet the REIT's quarterly asset and annual income tests.

A key difference between a TRS and a QRS is their tax treatment, with a TRS facing corporate income tax and a QRS being tax-free.

Acquiring assets can be a great way to grow your business, but it's essential to understand the rules and benefits involved. A key benefit of acquiring hotel or healthcare assets is that a REIT can own the property and lease it to a third party or a TRS, which can then engage an eligible independent contractor to operate the property.

To avoid losing TRS status, a hotel or healthcare asset must be managed carefully. This means that a TRS cannot directly or indirectly operate the asset without losing its status.

A TRS can lease a hotel or healthcare asset from a REIT, but only if an EIK is engaged to manage the property. An EIK must be in the business of managing unrelated healthcare or hotel properties, and there is no specific number of properties required, but large diversified operators may be less likely to raise concerns.

Proper diligence is crucial when setting up intercompany lease arrangements between a REIT and its TRS. This includes ensuring that the terms of the lease are arms-length, as a failure to do so could result in the REIT facing a 100% tax.

A transfer pricing specialist can help evaluate the economics of intercompany lease terms and ensure they are in line with comparable third-party arrangements. This can be memorialized in a transfer pricing study report, providing support for the rent structure in the lease.

A REIT is not treated as providing services or management when the services are provided by a Taxable REIT Subsidiary (TRS). This means a REIT can provide a range of services to its tenants without disqualifying the rents received from being treated as real property rents.

A TRS is a corporation in which the REIT owns stock and elects to be treated as a TRS. This allows a REIT to provide non-customary services to its tenants without imposing a separate charge on them.

A TRS can provide services other than customary services to tenants without disqualifying the amounts received by the REIT from treatment as rents from real property. This includes services like housekeeping, telecommunications, and management.

A REIT can use a TRS to provide services to third parties that are unrelated to the REIT. This means a REIT can expand its services beyond just its tenants.

The TRS can even enter into partnerships with unrelated corporations to provide services to tenants. This allows a REIT to tap into new markets and services without losing its REIT status.