REIT Spinoffs: Passive REITs, Active Businesses

I. INTRODUCTION

A real estate investment trust is essentially a corporation that pools the capital of many investors to own and operate income-producing real estate assets. REITs enjoy a unique hybrid status for federal income tax purposes. From a shareholder's perspective, a REIT is a separate taxable entity. A REIT shareholder generally is taxed only on dividends paid by the REIT and on gains upon the disposition of REIT shares, and, unlike in a tax partnership, is not deemed to be conducting the entity's operations. A REIT is a corporation for U.S. tax purposes, but because it receives a dividends paid deduction, the REIT generally is not subject to corporate tax if it distributes to its shareholders substantially all of its taxable income for each year.¹ As discussed below, REITs must satisfy numerous requirements to enjoy their special status.