The Law Office of Lynnette Ariathurai A Professional Corporation

Many choose REITs during business formation for tax advantages

When forming a new business entity or even reorganizing into a different type of entity, it is important to consider all available options in order to maximize profits while also minimizing costs. Many entrepreneurs and business people in California and other states are realizing that choosing to form a Real Estate Investment Trust (REIT) during business formation may help save on costs from tax liabilities. However, the ability to do this may depend upon how the term “real estate” is defined by regulating authorities.

Current law requires a business to earn at least three-fourths of its income via real estate. However, the Internal Revenue Service (IRS) has chosen to broadly define what real estate is in its rulings. The IRS has stated that “structural components” and “inherently permanent structures” can be considered real property for tax purposes. This significantly expands the definition of real estate to include more than just buildings and land.

Iron Mountain is one company that recently decided to reorganize into a REIT in order to save as much as $150 million in tax liabilities. In another case, a private corrections company reorganized into a REIT based on the argument that the company was acting as a landlord for tenants, which in this case were the inmates. Reorganizing into REITs has shown to help boost the value of publicly traded stocks.

However, there are certain legislators who want to limit the ability of companies to organize into REITs during business formation in California as well as other states. Therefore, before ultimately deciding on a REIT as one’s business entity, it is best to have the latest updated information regarding the law. Also, if one decides to move forward with organizing into a REIT, the appropriate legal documents must be correctly filled out and submitted to the proper regulating agencies.

Source: The Boston Globe, "Growing recognition of real estate cuts companies tax bills", Jack Newsham, Aug. 17, 2014

Source: The Boston Globe, "Growing recognition of real estate cuts companies tax bills", Jack Newsham, Aug. 17, 2014

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