Treasury Releases Proposed Regulations Confirming Qualified REIT Dividend 20% Deduction Applies to Mutual Fund Shareholders
Proposed Treasury Regulations Address Treatment of Mutual Fund Dividends Arising from Mutual Fund Investment in REITs
Today the Treasury Department released final and new proposed regulations related to the 20% deduction for certain business income enacted in the 2017 tax reform bill (known as the Tax Cuts and Jobs Act or TCJA).
The new proposed regulations confirm that the section 199A 20% deduction applies to Qualified REIT Dividends received by mutual fund shareholders. Comments on the new proposed regulations are due 60 days after the publication of the regulations in the Federal Register.
The timing of this guidance is significant for the preparers of Forms 1099-Div which are due to shareholders in a matter of weeks. New box 5 on the 2019 Form 1099-Div is specifically designated for section 199A dividends, including Qualified REIT Dividends to direct REIT shareholders and which Treasury, through the new proposed regulations, has now confirmed includes those mutual fund dividends that are properly treated as Qualified REIT Dividends. Taxpayers may rely on the new proposed regulations until final regulations are published.
The new proposed regulations follow the explanation of the treatment of mutual fund (RIC) dividends as set out in the General Explanation Of Public Law 115-97 , otherwise known as the “Blue Book” which states that Congress, “intended that in the case of an individual shareholder of a RIC that itself owns stock in a REIT . . . the individual is treated as receiving qualified REIT dividends . . . to the extent any dividends received by the individual from the RIC are attributable to qualified REIT dividends . . . received by the RIC.”
Further, Ways and Means Committee Ranking Member Kevin Brady’s 2018 year-end tax package that passed the House but was not enacted included a technical correction to TCJA confirming that mutual fund dividends attributable to REIT dividends are Qualified REIT Dividends for purposes of the Section 199A 20% deduction. The new proposed regulations address the issue sufficiently in the absence of enactment of the technical correction.
The final regulations clarify the 45 day holding period originally included in the proposed regulations released August 16, 2018 . The IRS also issued Notice 2019-7 , under which a rental real estate enterprise will be treated as a trade or business solely for purposes of section 199A.