Shortening the Built-in Gains Period?

By: Amanda Wilson

Exciting news of a possible tax change in the world of REITs, which are a popular tax vehicle in the senior living area.  Currently, if an existing C corporation converts to a REIT, it is subject to a 10-year built-in gains tax.   If a REIT sells assets within this 10-year period, it pays a corporate level tax to the extent any of the gain on the sale was already built-into the asset at the time it made the REIT election. For example, assume a corporation has an asset with a fair market value of $10 at the time it converts to a REIT. If the corporation later sells the asset for $12 within the 10 year built-in gain period, the REIT would pay corporate level tax to the extent that it had gain attributable to the first $10 of the sales price.

A recent proposal in the House of Representatives would permanently reduce this 10-year period to 5 years. This change is proposed to be retroactive to January 1, 2015. This change, if it makes its way into law, would be great news for REITs. Stay tuned!

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