Real estate investment trust (REIT) investors are paying billions of dollars in federal taxes each year, according to an analysis by The Associated Press that found more than $6.6 billion in tax liabilities to the federal government as of late 2016.
The AP analysis found that REITs, which have been around since the 1970s, are responsible for more than 80% of all federal taxes owed by the U.S. government.
REIT investors, whose primary goal is to sell their properties to private buyers, pay more in taxes than those in traditional real estate, which is typically managed by real estate professionals.
While the number of REIT tax liability has grown dramatically over the past decade, the AP analysis showed the total amount paid to the IRS has not kept pace with the rise.
REITS’ total taxes for fiscal year 2016, which ended Sept. 30, were $4.7 billion, more than twice the amount paid by taxpayers in all other tax years combined, according the analysis.
The REIT sector’s tax liability topped $8.3 billion for the first time in the AP’s analysis.
The IRS has been trying to rein in REIT profits by raising the tax threshold for the most recent tax year to $1 million from $500,000, and imposing new rules for how much tax REIT investment trusts can collect from their investors.
The IRS recently released its first-ever tax guidelines for REIT and other investment companies, which it said would help the sector’s owners and investors get the most from their investments.
While many real estate investors don’t want to have to pay the full amount owed by their investment trust because they believe the value of the property could increase in the future, the IRS and some tax experts say that’s unlikely.
The tax rules are designed to discourage the wealthy from purchasing property that might be taxed at a lower rate in the long run, said Mark Ralston, an assistant professor of tax at the University of Michigan Law School and co-author of a report on REIT taxes published in August.
For years, the government has been pressuring REIT companies to raise the tax thresholds that would allow them to collect a higher share of their revenue.
Under the current tax rules, REIT investments have to earn more than 50% of their value in a year before being subject to tax.
But Ralstone said that’s not the case anymore because most REIT businesses have grown significantly over the last decade.
Over that time, average net income has increased by almost 30% while tax rates have dropped significantly, he said.
The average REIT income in 2016 was $7.6 million, down from $7 billion in 2007, according a government analysis of data from the Federal Reserve Bank of St. Louis.
While that’s still a lot of money, Ralstein said the average REI’s income was about $30,000 less than in 2007.REITs have been under increasing scrutiny for years.
The U.K.’s Treasury department recently warned that the REIT industry is growing so fast that it could become a major drag on the economy.
In the years since the tax overhaul passed in December, the tax code has tightened some of the rules governing investment trusts, including requiring a higher threshold to collect taxes.
But the rules haven’t been as stringent as they need to be to stop REIT gains from being used to finance the tax bill.
And some tax-related changes that would have applied to real estate have been made without the benefit of a Congressional budget resolution.
Reid Hoffman, a partner at the tax firm BakerHostetler LLP in Washington, D.C., said the new rules could cause more REIT losses than they are worth.
The government has not given REIT operators any new incentives to increase the number or size of their businesses, Hoffman said.
REIs have been given limited flexibility to change their business structure in order to improve tax returns, he added.
“It’s an important part of the REI business model,” Hoffman said of REITS.
“I would expect the IRS to be interested in getting more clarity on how to treat REIs more fairly, to make sure that they’re paying taxes that are not going to hurt their growth.”
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To contact the reporter on this story: Rebecca Wojcicki at [email protected]