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Reforming REIT Taxation (Or Not)

Tax law treats the income of real estate investment trusts (REITs) differently from the income of regular corporations. Income distributed by regular corporations is subject to an entity-level tax and a shareholder-level tax, while taxable income distributed by REITs is subject to tax only at the shareholder level. To qualify for that single-level of tax, REITs must hold primarily real estate assets, and their income must be primarily from such assets. After being a relatively insignificant part of the economy for the first three decades of their existence, REITs have become relevant over the last twenty years, with the market capitalization of publicly traded REITs eclipsing 5% of U.S. GDP at the end of 2014. Reports about REITs appear frequently in major media outlets, and many emphasize corporate-tax-base erosion that results from REIT spinoffs and conversions. Calls for REIT reform have been answered with proposed legislation that would change various aspects of REIT taxation. Recent work in this area shows that even though REIT spinoffs and conversions do erode the corporate tax base, the requirement that REITs distribute income and the higher tax rates of REIT shareholders offset corporate-tax-base erosion and minimize the tax-revenue effects of REIT taxation. This Article examines the history of REIT taxation and identifies Congress’s purposes for enacting REIT legislation and amending it over the years. The Article examines the criticisms of REIT taxation and analyzes REIT taxation based upon how well it accomplishes Congress’s purposes and satisfies traditional tax-policy objectives. Based up on that analysis, the Article finds that REIT taxation is benign, and it benefits the economy by helping to stabilize real estate markets. The Article then compares the REIT regime with various reform alternatives. Not surprisingly, after finding that REIT taxation is benign and beneficent, the Article concludes that maintaining the status quo is more attractive than any of the reform alternatives.