IRS Loosens Up On Liquidating Distributions By REITs

The IRS has issued a private letter ruling (PLR 201103001) that may provide greater flexibility to real estate investment trusts (REITs) using the consent dividend mechanism to avoid US tax on liquidations. In some cases, this mechanism could be used by a REIT to pay a tax-free debt financed distribution to a foreign investor prior to the ultimate liquidation of the REIT.

REITs are required to distribute the bulk of their ordinary income annually and are permitted to claim a deduction for ordinary dividends and capital gain dividends paid to their shareholders. A REIT that does not have sufficient cash or other assets to fund the distributions the REIT needs to make in order to maintain its qualification as a REIT or to eliminate its taxable income is permitted, with the consent of its shareholders, to designate an amount that is not actually distributed as a deemed dividend ("consent dividend"). A consent dividend is treated like an actual distribution under the