Even the IRS Says State & Local Valuations Are No Danger to REIT Status
By David Chitlik Vice President - Hospitality Tax, Altus Group | April 02, 2017
The value of Real Estate Investment Trust (REIT) status can't be overstated. By meeting quarterly asset and income tests, REIT dividends can pass through to investors without running a federal corporate income tax gauntlet.
It's the reason for REITs in the first place. It's why Ashford Hospitality Trust owns more than 25,000 rooms, and why Apple Hospitality REIT owns 236 hotels operating under Marriott or Hilton flags. And why Hilton recently split into Park Hotels, owners; and Hilton, managers.
The advantages of REITs have created a dominant force in hotel ownership, as well as taxable REIT subsidiaries (TRS) to manage hospitality venues, but those advantages also have created windfalls for state and local tax jurisdictions because of lost opportunities to establish proper real estate values at point of sale.
Local and state officials are quite happy to accept the extra tax revenue, even if they wonder why it's being paid.
In many cases, accountants, chief financial officers, advisors and others' fear of losing REIT status is holding state and local tax filings hostage, costing hospitality companies and their investors hundreds of thousands – and, in some cases, millions – of dollars in overpayments. Many REIT consultants consider that money a form of insurance against jeopardizing investors' tax advantages, but it's unnecessary coverage with premiums that can be paid in perpetuity. It can be the gift that keeps on giving to state and local tax jurisdictions.
Here's How to Remedy the Situation
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