REIT Tax Guidance Helpful but Challenges Remain

3/31/2011 | By Matthew Bechard

Dianne Umberger, principal with Ernst and Young and REIT leader of their national tax department, spoke with during REITWise 2011: NAREIT's Law, Accounting & Finance Conference in San Francisco about the impact of IRS guidance on REITs.

She said that the IRS has stepped up over the past few years and has been very flexible in providing REIT guidance by helping to answer questions that the law may not address or where there are obvious gaps in the law.

"All of these signs have been very helpful for REITs to be able to operate at their best capacity," she said.

In regards to health care REIT tax issues, Umberger added that REITs have been impacted in a number of ways by the recent move to allow taxable REIT subsidiaries (TRSs) in the sector.

REITs "are looking at their businesses and they are considering whether to implement and how to implement the RIIDEA structure," she said. Although currently this is an option and not mandatory, Umberger stated that a couple of REITs have already started moving in that direction.

"It gives them a lot of flexibility and it depends on the type of operator that they are engaging with," said Umberger.

However, she warned that there are pitfalls for REITs to watch. "The biggest challenge still to REITs in this sector is figuring out how to get comfortable with 482 transfers pricing, arms-length dealings between the REIT" and taxable REIT subsidiaries.

Umberger added that another challenging area is lender restructuring. "When you have the introduction of a TRS in the structure, there may be cash management, lock box issues and state licensing issues where the license is held by one entity but not necessarily by the owner, TRS or operator, so you have to figure out where to put the license," she said.

One of the most important tax-related issues facing REITs in the near term is over the 100 percent excise tax provisions, Umberger said.

"With the amount of scrutiny REITs are getting, that's just a constant issue that's facing the industry, with no concrete clear guidance."