US Lawmakers Question REIT Tax Loopholes Amid IRS Warnings
US lawmakers and tax authorities are raising concerns over how some real estate investment trusts (REITs) manage their subsidiaries. Senator Elizabeth Warren has called for stricter enforcement, while the IRS has warned that certain practices could strip REITs of their tax-exempt status. The focus is on whether taxable REIT subsidiaries (TRSs) are improperly operating or managing properties leased from their parent companies.
REITs avoid corporate-level income tax by distributing all taxable earnings, but their subsidiaries—known as TRSs—are taxed like regular businesses. A key rule allows REITs to collect rent from lodging and healthcare facilities leased to a TRS, provided the TRS does not directly or indirectly operate or manage them.
In a September 2024 letter, Senator Warren urged the IRS to investigate large health and hospitality REITs. She claimed some TRSs hold excessive control over labour terms, including the power to veto collective bargaining agreements or take part in union negotiations. However, her letter did not name specific companies or detail any confirmed violations. The IRS responded to Senator Ron Wyden earlier, stating that indirect operation or management of lodging facilities by a TRS breaks tax rules. The agency warned this could cost the REIT its tax-exempt status. Yet the IRS letter remained vague, citing unnamed industry sources and describing disapproved conduct without clear definitions. Neither the IRS nor Senate committees have publicly identified REITs for illegal tax advantages or improper tenant interference between 2021 and 2026. While litigation and regulatory scrutiny continue for some firms, no formal findings have been released. The IRS also clarified that approving major contracts, such as collective bargaining agreements, does not automatically count as operation or management—but negotiating them might.
The IRS and Senator Warren's letters highlight ongoing uncertainty about what constitutes direct or indirect operation of properties by TRSs. Without clearer guidance, REITs and their subsidiaries face potential risks to their tax status. The issue remains under scrutiny, though no specific violations have been publicly confirmed.
