NEW RULES FOR REITS PROPOSED
There are proposals before congress to make four changes to the way REITs are defined and taxed. The main target of this legislation is to break up the perceived advantages of the ""paired share" REITs.
The first proposal will prevent a REIT from owning more than 10% of any subsidiary's voting stock or value. Currently the REIT can own no more than 10% of the voting power; but can own any amount of the value.
The second proposal will impose a tax on the merger of a REIT and a "C" corporation. The amount subject to tax will be the fair market value of assets above the adjusted basis of those assets.
The third proposal would treat the paired or stapled REITs as one entity for tax purposes. This would effectively eliminate any tax benefits of the pairing.
The fourth proposal will prevent any one person (real or artificial) from owning more than 50 % of the value of a REIT. Currently a REIT must be owned by 100 or more persons; but a widely held "C" corporation can own most of the value.
A REIT is a pass-through entity for tax purposes; but is otherwise structured like a corporation. The main characteristic that separates the REIT from an "S" corporation is the requirement that it must pay out 95% of it's income each year.
REITS frequently form "C" corporations to perform management and brokerage services. The dividends paid by this subsidiary are included in the 95%. The stock of the "C" corporation and the units of the paired REIT are sold together. There are only 4 paired share REITS remaining. They are attractive as takeover targets because of their grandfather status.
Another type of cooperative arrangement is the "paper clipped" or "stapled" REIT. This type of arrangement permits the shares to trade separately.
In addition to the structural changes proposed there is a proposal to allow REIT's to retain capital gains and pay tax at the trust level. The shareholders would receive a credit for their share of the tax paid.
WHEN THE TENANT MOVES OUT EARLY
the landlord has an obligation to re-lease the property.
According to most leases the tenant is obligated to pay the rent and perform the obligations of the lease whether they occupy the property or not. If the tenant continues paying the rent, and tries to sublease the property or otherwise protects their rights under the lease, the landlord is probably safe.
When the tenant moves out and breaches the lease, the landlord needs to mitigate the damages by attempting to re-lease the property.
There are differences of course in residential or commercial leases. Residential leases are normally subject to state laws. In NC we have section 42a, dealing with tenant-landlord issues. Commercial leases are regulated by the terms of the leases themselves and by the Uniform Commercial Code.
Under the old common law of most states a landlord has no obligation to mitigate.damages; but recently courts have be deciding that landlords are like any other aggrieved parties to contracts. The aggrieved party in a commercial contract has a obligation to mitigate the losses incurred.
In 42 states and the District of Columbia, the landlord is required to attempt to re-lease the property in order to mitigate damages.
WHY DO PEOPLE BUY INVESTMENT PROPERTY
(Continued from Vol.5).We have covered the four elements of an investment, which explains the rational choices investors make between properties. There are other motivations for investing in real estate as well.
Many investors buy property for the pride of ownership. This factor is at work on the smallest, crummiest rental house and the signature office building or mall.
Investors frequently buy properties away from their home as a hedge against a deterioration of the local economy. Some will even buy in other countries to minimize political risk
Real estate is almost the only industry in the world, where you can be an "investor" with no money to invest. More of the millionaires in the US made their money in real estate than in any other field.
According to Loopnet, of the 400 richest people in the world, 14 earn a significant percentage of their wealth from real estate. Of those 11 are from Asia.
In the USA, real estate still receives very favorable tax treatment and is an excellent way to build and preserve wealth.
GIVING WEALTH AWAY MAY BE THE BEST WAY TO PRESERVE IT?
Especially if you use a Charitable Remainder Trust. This trust gives the property away; but reserves the income and control for a beneficiary. Income and Capital gains are non-taxable as long as they remain in the trust. The income that is taken from the trust is taxable.
A property with low basis and no income could be donated to the trust. The donor can deduct an amount equal to the estimated present value of the ultimate donation in the year it is donated.
This property could be sold, with the proceeds remaining in the trust and being invested. Since no capital gains tax is paid on the sale and no income tax is paid on dividends or rents, capital is preserved.
There are several versions of the Charitable Remainder Trust. In the Charitable Remainder Anuity Trust a payment is required of at least 5% of the initial fair market value of all properties placed in the trust.
In a Charitable Remainder Uni-trust, the annual distribution can be based on either the current fair market value of the properties in the trust or the current years income.
There is also a Charitable Remainder Insurance trust. The principle behind the trust is that the investment amount left untaxed will produce so much more revenue that one can afford to give up the initial investment amount after a period of time.
ONE SELDOM MENTIONED CHANGE IN THE TAXPAYER RELIEF ACT Is the way net operating losses are handled. Under the old rule they may be carried back 3 years and carried forward 15 years. Now they may be carried back 2 years and carried forward 20 years.