REIT MODERNIZATION ACT IN TAX BILL APPROVED BY CONGRESS
August 6, 1999
Congress recently completed action on a $792 billion tax bill that the President has promised to veto when it reaches his desk. On August 5, the House and Senate approved H.R. 2488, the Taxpayer Refund and Relief Act of 1999 (TRRA). The TRRA represents the House and Senate compromise regarding S. 1429, the Taxpayer Refund Act of 1999 (TRA), approved by the Senate on July 30, and H.R. 2488, the Financial Freedom Act of 1999 (FFA), as passed by the House of Representatives on July 22. Congress is expected to delay sending the bill to the President until September.
REIT Modernization Act: Included with a Change to Transition Rule
The TRRA adopts the same provisions from the REIT Modernization Act of 1999 ("RMA") that were incorporated in both TRA and the FFA, with one change to the grandfather rule that permits REITs to continue to own existing third party subsidiaries (TPSs). Specifically, the TRRA adopts the taxable REIT subsidiary (with some beneficial technical changes), 90% distribution test, health care REIT, and other provisions of the RMA except that the provisions would apply a year later (taxable years beginning after 2000), and TPSs would lose their grandfathered status if a REIT acquired more of their debt or equity securities other than through certain binding contracts and reorganizations. Regularly updated details on the RMA provisions can be found in the Government Relations section of NAREIT's web site, www.nareit.com
Closely Held REITs
The TRRA also adopts the same restrictions on closely held REITs (i.e., a REIT 50% or more owned by one person) as the TRA and FFA, including an almost identical exception for incubator REITs, but it adopts the TRA's additional exception for companies that became closely-held REITs pursuant to transactions described in filings with the SEC on or before July 14,1999. The TRRA also included the provisions in the TRA that would raise some revenue by modifying the estimated tax rules for closely held REITs, effective beginning with estimated payments due on September 15, 1999.
As with the TRA, the TRRA would require any person owning at least 10% of the vote or value of a closely held REIT to accelerate the recognition of year-end dividends attributable to such REIT for purposes of such person's estimated tax payments. It would define a closely held REIT for estimated tax purposes as one in which at least 50% of the vote or value is owned by five or fewer persons. It appears that the estimated tax proposal would apply to owners of REITs that are grandfathered from the proposed new ownership rules on closely held REITs.
Personal Property Rule
The TRRA included the provision adopted by the Senate that would change the measurement of the REIT 15% personal property rule from adjusted tax basis to fair market value. It postponed the effective by one year, however; it applies to taxable years beginning after December 31, 2000.
Change to Determination of Related Party Rent
The TRRA also included a change in how a REIT should determine rents from a related party. Under current law, amounts are not considered "real property rents" if a REIT receives them from a corporate tenant in which the REIT owns 10% or more of its voting stock or the number of shares (regardless of value). Unlike the TRA, TRRA would change the rule to a 10% vote or value test, effective for taxable years beginning after December 31, 2000, except for amounts paid pursuant to binding contracts in effect on July 12, 1999.
Other Real Estate Related Provisions
The TRRA also would: (1) extend the exception for qualified nonrecourse financing to publicly traded debt, (2) reduce the depreciation recapture rate from 25% to 23%, and (3) direct the Treasury Department to include the write-off period for tenant improvements in its study of depreciable assets expected to be issued in 2000. The TRA (but not the FFA) had included a provision that would have lowered the write-off of the costs of tenant improvements from 39 years to 15 years to better match economic realities.
For more information, please contact:
Tony M. Edwards
Martin L. DePoy
Dara L. Freedman