He spoke about some of the tax issues facing REITs today, including how states tax REITs. Melehani said, generally, most states will follow federal income tax treatment in the sense that they’ll have dividend paid deductions.
“A lot of the states will not impose income taxes on these REITs,” he said. More often there is incidence of tax on the partnership level, according to Melehani.
In states like Pennsylvania and Tennessee he said that the taxes can be “quite significant” and catch owners by surprise.
“It tends to be very difficult to navigate from a state and local perspective.
When it comes to recent development that have effected this tax treatment, Melehani pointed to several that he says have become “troublesome.”
“The first is the rise in the change of the method of taxation. A lot of states have begun moving toward gross receipts-type taxes. There’s some discussion about Nevada and New Mexico moving toward that type of taxes,” he said. “A gross receipts tax is certainly no benefit for a dividend paid deduction, so it does make it a higher burden. That has made it difficult for REITs to do business in a lot of these jurisdictions.”
The rise of the administrative process of complying has also become a difficult issue, according to Melehani. He said that there are a lot of jurisdictions imposing tax on these entities at a much lower level.
Additionally, he discussed some of the potential traps of state taxation.
“The transfer tax is a very difficult area of the law that has really caused a lot of problems. A lot of REITs are trying to clean up their structures and get rid of unwanted entities within the group. As a result of that if you’re not careful you can trigger a lot of transfer tax,” he said.