Megan Brackney, Jacob Paikin, and Rasheena Reid wrote an article titled “Advising Healthcare and Hospitality REITs through Increasing Scrutiny” on the increasing tax enforcement against real estate investment trusts (REITs) for The CPA Journal. Regulators have expressed concern that REITs in the healthcare and hospitality sectors are violating tax rules, and crackdowns on suspected noncompliance are expected to increase.
REITs are an attractive asset to both experienced and novice investors, as they can remove barriers to investing in commercial real estate by creating shares through multiple investors’ capital. At least 75% of a REIT’s income must come from real estate. Under IRC Sections 856-858, REITs are also mandated to pay distributions to the shareholders equating to at least 90% of the entity’s income. Even though they are formed as corporations, REITs are unique in that they are not subject to federal income tax in most cases.
Initially, Congress created REIT tax rules to level the playing field for small investors. However, as of August 2024, the value of all publicly traded REITs was more than $1.5 trillion, and there were over 150 REITs on the New York Stock Exchange. Notably, many of these holdings include hotels and healthcare facilities. REITs in these particular industries now face more scrutiny from Congress and the IRS as they are subject to unique restrictions other REITs are not.
Tax professionals in the REIT space are urged to consider the civil and criminal tax impacts these entities may face. Increased enforcement may result in large penalties that affect healthcare and hospitality REITs and shareholders.
You can read the full article in the CPA Journal here.
Megan is a tax controversy attorney with a distinguished track record of delivering exceptional results for clients facing complicated and difficult tax issues. The current Chair-Elect of the American Bar Association Section of Taxation, she is also a frequent speaker and contributor to local and national conferences on taxation, ethics in tax practice, IRS penalties, and civil tax controversy.
Jacob is a pre-law paralegal at Kostelanetz who graduated from Johns Hopkins University in June of 2024 with degrees in Political Science and Economics. Rasheena Reid was a Georgetown LLM extern at Kostelanetz who earned her J.D. from the University of Pennsylvania Law School in 2003, where she was a senior editor on the University of Pennsylvania Law Review. After graduating, Rasheena worked as an Office Director for USAID and as an attorney in the Villanova Widger School of Law Federal Tax Clinic.
