Captive Real Estate Investment Trust

What Is a Captive Real Estate Investment Trust?

A captive real estate investment trust is basically a real estate investment trust (REIT) with controlling ownership by a single company.

A company that claims real estate associated with its business might find it advantageous to bundle the properties into a REIT for the special tax breaks. This tax alleviation strategy can be utilized by retailers and banks with many stores or branches.

Understanding Captive Real Estate Investment Trusts

A captive real estate investment trust can be made to take advantage of the tax breaks offered by a real estate investment trust (REIT). Companies might decide to create or take controlling ownership in a REIT for captive status. Controlling or captive status is defined as over half of the voting ownership stake of a REIT.

Companies that build a captive REIT to deal with their own real estate properties will commonly portray them as one or the other rental or mortgage REITs. Mortgage REITs (mREITs) give mortgage capital to the commitment of reciprocal income, which is much of the time the basis for a REIT's revenue. Companies may likewise utilize captive real estate investment trusts by transferring real estate into a REIT, and afterward renting the properties from those REITs.

Real Estate Investment Trusts

A captive REIT is a REIT with controlling ownership from a single company. Past that, captive REITs are essentially REITs. An entity can be classified as a REIT on the off chance that it meets certain requirements of the Internal Revenue Service and Title 26 of the Internal Revenue Code. REITs can be trusts, associations, or corporations — however notwithstanding they must all choose to be taxed as corporations.

The Internal Revenue Code permits all REITs to disseminate all of their income to their shareholders. This makes REITs like partnerships under the tax code since partnerships generally have no income and disseminate all of their income through a [K-1](/plan k-1).

REITs must meet several requirements to fit the bill for the income distribution tax deductions that portray REITs overall. In particular, a company must meet the accompanying requirements to qualify as a REIT:

• Taxable as a corporation
• Pay something like 90% of taxable income as shareholder dividends every year
• Determine somewhere around 75% of gross income from rents, interest on mortgages that finance real property, or real estate deals
• Invest somewhere around 75% of total assets in real estate, cash, or U.S. Depositories
• Have somewhere around 100 shareholders (controlling companies might name executives as shareholders to meet this requirement)

On the off chance that an entity meets the REIT requirements, it must pay something like 90% of its income to shareholders and is in this way permitted to take the income distribution as a deduction. Any excess balance after the required distribution is taxed at the vital corporate tax rate.

Subsidiary Accounting

Captive REITs are viewed as auxiliaries and consequently their ownership must be accounted for here and there on the parent company's financials. Generally, there are three methods for accounting for auxiliaries and subsidiary ownership on a parent company's financial statements. Companies can report consolidated financial statements, or they might account for the ownership through either the equity method or the cost method.

Under Generally Accepted Accounting Principles (GAAP), companies have the option to make consolidated financial statements that integrate all parts of a subsidiary's financials in the event that the parent company claims greater than half of the ownership rights. Commonly, it isn't beneficial or applicable for a parent company to remember a captive REIT for consolidated financial statement reporting. That is a direct result of the tax benefits the captive REIT gets all alone, which are many times the justification behind making it. Consequently, captive REIT ownership is normally accounted for on a parent company's financials through either the equity method or the cost method.

Captive REIT Tax Benefits

There can be several tax benefits associated with captive REIT taxes. Federal taxation of REITs is talked about in Internal Revenue Code Title 26, however states may likewise have their own tax rules for REITs that can increase or diminish the tax benefits.

By and large, the parent company of a captive REIT can deduct rent or mortgage payment costs it pays to its captive REIT, which diminishes its taxable income. In any case, this isn't really a colossal benefit since it would regularly deduct these expenses. All things considered, it can make a few supportive advantages in payment processing, and so forth. One of the greatest advantages is that the parent company gets a part of the dividend distribution from the captive REIT, which might possibly be taxed at a lower rate.

The captive REIT partakes in all of the tax benefits of REIT status. It can deduct the 90% or greater amount of its income it disseminates to shareholders. It additionally pays the federal corporate tax rate on any leftover income.

Laws Governing Captive REITs

Since captive REIT auxiliaries might possibly make several advantages, there are some federal and state provisions that target them. By and large, most legislation characterizes captive as controlling ownership of half. Federal laws expect that any medicines are fair and in accordance with property valuations and a manageable distance talks.

A few states have their own special requirements. Now and again, there are limitations that might take out tax avoidance strategies thoroughly. Overall, accounting and tax experts ought to guarantee that captive REITs and captive REIT accounting are consistent with all federal and state laws.

Features

• As REITs, captive REITs partake in all of the tax advantages of a standard REIT.
• Captive REITs are generally auxiliaries of different firms.
• Accounting and tax experts ought to guarantee they are completely agreeable with all federal and state laws enveloping captive REITs.
• Extensively, captive REIT accounting can be complex for a parent company and the captive REIT subsidiary.
• A captive REIT is any REIT with greater than half ownership stake by a single company.

FAQ

What Is a Non-Captive REIT?

A non-captive REIT is one that isn't defined as captive; i.e., it doesn't have a single majority shareholder.

How could a Company Form a Captive REIT?

REITs manage the cost of certain tax advantages, thus a company might seek to take a controlling stake in a real estate investment trust to partake in those advantages. A captive REIT can likewise permit a corporation to all the more effectively control and oversee properties that it as of now claims.

Why Are Captive REITs Scrutinized by the IRS?

Since it tends to be a tax minimization strategy, accounting for a captive REIT appropriately and in compliance with state and federal tax rules. Also, since these substances are many times structured as corporate auxiliaries, extra layers of tax consideration are justified. Since captive REITs have been utilized before to stay away from state or federal taxes, they are frequently examined.