A.D. Pruitt for the Wall St. Journal writes: A powerful congressional committee is examining the tax exemption that real-estate investment trusts have enjoyed for decades as part of its comprehensive review of the tax code.
The House Ways and Means Committee has been re-examining the tax code looking for ways to boost economic growth by closing some loopholes, simplifying the code and reducing the tax burden on the middle class.
The committee is looking at the REIT tax exemption along with all other tax rules.
"Like all other aspects of the code, it is reasonable to expect that REITs would be included in any top-to-bottom review of the code," said a spokeswoman for the Ways and Means committee, whose chairman is Dave Camp, (R., Mich.). "The chairman has long made it clear that everything is on the table."
Since they were established in 1960, REITs haven't had to pay corporate taxes on their income as long as at least 90% of their taxable income is paid as dividends. The tax savings from this exemption, which have allowed them to pay more in dividends, has been one of their main selling points.
Industry officials and analysts say it is unlikely that REITs will lose their tax exemption because it doesn't result in a major loss of revenue to the Treasury. They point out that REIT dividends are taxed at a higher rate than other corporate dividends, 39.6% versus 20%.
REITs paid $29 billion in dividends to shareholders in 2012, according to the National Association of Real Estate Investment Trusts. If the 195 REITs lost the tax exemption and dividends were taxed at the same lower rate as other corporations, the amount gained would largely be offset by the amount lost from the lower tax rate on dividends, industry officials say.
Industry officials also note that the first REITs were established to give individuals an easy way to invest in income-producing real estate. If they lost their tax exemption, they would likely pay lower dividends and act more like other companies. "REITs are a creation of the tax code, so it's no surprise that all parts of the tax code would subject to a review," said Tony Edwards, general counsel of Nareit.
Industry officials say a major change in REITs' tax status would send shock waves through the real-estate world. "It would be a major issue," said Tom Gallagher, a tax attorney with Cozen O'Connor. "You've got an entire industry…predicated on the idea that you will not have any level of tax imposed on those entities."
In an editorial earlier this month, Mr. Camp and Sen. Max Baucus (D-Mont.) said a key component of tax reform would be a level playing field for employers. "The current U.S. corporate tax rate is the highest in the world. Yet in recent years, some of America's largest corporations have paid zero tax," they wrote.
REIT tax rules are coming under review at a time when some analysts and investors are raising concerns over nontraditional real-estate companies converting to REITs. There are seven companies, including gambling operator Penn National Gaming,PENN +0.32% that are either evaluating or have started the process of REIT conversion, according to a recent report by Jefferies LLC.
Real-estate industry officials are worried that Congress will scrutinize REITs more closely if members perceive that companies whose main business isn't real estate are abusing the exemption.
"I'm not a fan of sticking real-estate companies in a trust so you don't have to pay corporate tax," said activist hedge fund investor William Ackman of Pershing Square Capital during a recent real-estate conference sponsored by New York University. "If you push the envelope too much, it will lead to a crackdown on REITs in general."
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