Archive for the ‘Tax’ Category

Real Estate Investment Trusts

Monday, September 15th, 2008

As a follow up to my last post noting that hard assets, such as real estate, tend to be good inflation hedges, I wanted to provide some basics on real estate investment trusts (“REITs”).  A REIT is an investment vehicle that owns either mortgage notes, real estate or a hybrid that both mortgage notes and real estate.

REITs came into being in 1960.  Most REITs at that time were mortgage REITS – they owned mortgage notes on real estate assets.  However, today, real estate and hybrid REITS are common.  Via securities, a REIT allows one to invest in large, income-producing real property.  That said, REITs come in a variety of flavors and can be sliced and diced a number of ways.

In the United States, three types of REITs as securities exist.  Publicly-traded REITs register with the U.S. Securities and Exchange Commission (the “SEC”) and trade on national stock exchanges.  The are also non-exchange-traded REITs, which also register with the SEC, but which don’t trade on a stock exchange.  Finally, private REITS neither register with the SEC nor trade on a stock exchange.

Additionally, REITs may be distinguished by the type of real estate they invest in.  This can be either broad or narrowly-focused.  For example, there are office REITs, multifamily property REITs, hotel REITs, shopping center REITs, warehouse REITS and storage facility REITs.

Another way a REIT may differentiate itself is for it to focus on a specific state or geographical region.

Companies must qualify to be classified as a REIT.  To do so, they must meet specific requirements of the Internal Revenue Code.  These requirements include the following:

* The REIT must be managed by a Board of Trustees or a Board of Directors.

* The REIT must be taxable as a corporation.

* The REIT must have 100 different shareholders.

* No more than 50% of the REITs shares may be held by five or fewer individuals.

* REIT shares must be fully transferable.

* At least 75% of the REIT’s gross income must be real estate-related, such as from rents or mortgage interest.

* At least 75% of the REIT’s total assets must be real estate assets.

* The REIT’s stock in its taxable subsidiaries may not be more than 20% of its total assets.

* A REIT must distribute at least 90% of its taxable income to shareholders as dividends.

These are some, but not all, of the main limiting characteristics of a REIT. A good book on real estate syndication in general, including REITs, is Samuel K. Freshman’s Principles of Real Estate Syndication.

New Massachusetts Independent Contractor Advisory

Saturday, May 10th, 2008

Massachusetts employs a stricter standard than under federal law regarding whether an individual is an employee or an independent contractor. The Commonwealth first established its Independent Contractor law in 1990. Since then, it has been amended a number of times and, in 2004, significantly broadened.

Massachusetts uses a test in which three separate elements must exist in order for someone to be classified other than as an employee. On May 1, 2008, the Massachusetts Attorney General’s Fair Labor Division issued an advisory superseding the prior advisories on this topic and clarifying on how the three-part test is applied.

In contrast, the Internal Revenue Service used to use a 20-factor test that later was simplified into an 11 point test organized into three primary groups: behavioral control, financial control and the type of relationship of the parties. IRS Publication 15-A discusses these characterizations in detail, and this text provides an overview and information on related topics.