Update: OBBBA Tax Provisions Impacting REITs and Foreign Investors

The below is a non-exclusive list of the notable provisions for REITs and real estate investors, including a description of certain significant changes from the Initial Senate Draft:

Removal of Certain Retaliatory Tax Measures

Unlike the Initial Senate Draft, the final OBBBA omits the previously proposed Section 899 of the Internal Revenue Code, which would have authorized a range of retaliatory tax increases on companies from countries deemed to impose discriminatory taxes on U.S. persons or their controlled foreign corporations. Proposed Section 899 would have imposed up to a 15% incremental tax on companies from such “offending foreign countries” (“OFCs”).

Additionally, the final OBBBA does not include the planned repeal of the Section 892(a) exemption for foreign governments of OFCs, which would have resulted in significant new tax liabilities for sovereign wealth investors from these jurisdictions. The removal of these provisions maintains the status quo for foreign investors, including sovereign wealth investors, with respect to withholding and income taxes, avoiding a potential significant obstacle to REITs’ access to certain foreign capital.

Increase in TRS Asset Holding Limitation

The final OBBBA incorporates a provision — previously included in the House draft but absent from the Initial Senate Draft — that increases the limitation on the value of taxable REIT subsidiary (“TRS”) securities a REIT may hold. Effective for taxable years beginning after December 31, 2025, the permissible value of TRS securities that a REIT may hold will increase from 20% to 25% of the value of the REIT’s total assets. This adjustment restores a higher threshold that applied for taxable years beginning prior to January 1, 2018.

This change is expected to provide REITs with greater structural flexibility, particularly for those with substantial TRS operations, including REITs in the healthcare and hospitality industries and REITs owning service-intensive asset classes, such as data center and other infrastructure REITs. Overall, the expansion of the TRS asset test is likely to facilitate more efficient structuring and operation of REITs, enabling them to respond more effectively to evolving business and regulatory environments.

Preservation of Business Interest Deduction Limitation and Qualified Business Income Deduction Changes

The final OBBBA retains the provision from the Initial Senate Draft that would permanently allow taxpayers to calculate adjusted taxable income on an EBITDA basis (i.e., before interest, depreciation, and amortization). This change, effective for taxable years beginning after December 31, 2024, will increase the amount of deductible business interest expense.

Additionally, the final OBBBA makes permanent the current 20% deduction for qualified REIT dividends, thereby preserving the effective top federal tax rate of 29.6% on ordinary REIT dividends.

Conclusion

The changes reflected in the final OBBBA, as compared to the Initial Senate Draft, represent positive developments. The removal of proposed Section 899 and the preservation of the Section 892(a) exemption for foreign governments of OFCs, combined with increased flexibility for REITs to utilize TRSs and the extension of beneficial deduction provisions, are expected to support continued investment and operational efficiency in the real estate sector. Stakeholders are encouraged to consult with tax advisors regarding the evolving tax landscape and the impact of the OBBBA on their businesses and investments.