Top 3 proposed tax changes that the REIT market should be watching
By Toria Lessman, SVP, Underwriting Leader, Transactional Liability, Danielle Nieh, VP, Underwriting Leader and Hannah Tucker, Senior Underwriter
Strong balance sheets and access to credit and liquidity are helping the Real Estate Investment Trust (REIT) market continue to take advantage of a growing economy. But many are looking at The Biden Administration’s proposed tax changes and wondering the implications for their business.
At a high-level some of the proposed changes could make REITs an even more attractive investment tool—fueling an increase in REIT activity. Details on the implications of each are outlined below:
- Increase in the corporate tax rate
The government has proposed increasing the income tax rate for C corporations to 28%, up from the current rate of 21%. Large corporations will be impacted by a 7% increase in the corporate tax rate, potentially increasing their tax liability by a substantial amount, and in turn, decreasing profit and stock value.
As such, investors may start looking at alternative investment strategies outside of the S&P 500 that provide a better return, like REITs. Since REITs are not subject to corporate taxes, they are protected from this increased tax exposure if they meet their respective REIT qualifications. The American Jobs Act, which proposes numerous infrastructure investment plans, will likely incentivize taxpayers to invest in REITs, specifically in infrastructure REITs.
- Limitations on 1031 like-kind exchanges
A 1031 like-kind exchange potentially allows a taxpayer selling real estate to defer their capital gains by putting the sale proceeds into a purchase of similar real estate. If 1031 exchanges are limited by adding a threshold of how much the gains can be deferred, this tax deferral regime will be disrupted, resulting in a tax liability for many taxpayers selling and subsequently buying real estate through a like-kind exchange.
While many taxpayers may be hesitant to sell properties because it would incur a large tax bill, alternative tax deferring strategies like REITs may be explored.
- Expansion of REIT qualifying property and income
Lastly, due to the American Jobs Act (also known as the infrastructure package), REIT qualifying real estate and income could be expanding. This package proposes numerous investment plans such as in the electric vehicle market, giving incentives to build a network of charging stations, as well as investment plans for battery farms, carbon storage and high-speed broadband to every American household.
This could allow more REIT options and opportunities, while playing a pivotal role within the infrastructure development plans. Yet, it is still unclear how the IRS would characterize income from such activities if these investment plans go into effect.
While it’s impossible to know if or when these changes will pass, one thing is clear—REITs are not immune to the changes. To better understand the proposed policies and what they may mean for REITs, contact one of our specialists today.