U.S. Sen. Elizabeth Warren (D-MA) is urging the Internal Revenue Service (IRS) to increase its scrutiny of Real Estate Investment Trusts (REITs).
Last week, the IRS issued a warning about hotel and health care REITs pushing the boundaries of tax law, saying such violations could result in loss of their special tax status.
In a letter to IRS Commissioner Danny Werfel, Warren applauded the IRS’ recent statement and clarification but urged the agency to increase its scrutiny of the potential abuse of REIT tax breaks.
“Under the tax code, REITs can take advantage of lucrative tax breaks – including avoiding the 21 percent corporate income tax and qualifying for the 20 percent pass-through deduction for investors. REITs are supposed to be passive investment opportunities for smaller-scale investors …(but) REITs in the health care and hotel industries may be violating these tax rules,” Warren wrote to Werfel.
Warren cited some examples where she said REITs have had a negative impact.
“In Massachusetts, Medical Properties Trust (MPT) – a REIT that bought hospital properties from Steward Health Care (Steward) in 2016, saddling the hospitals with expensive lease agreements that ultimately drove Steward into bankruptcy – has a complex investment history with Steward that raises questions about whether it has met IRS requirements regarding the limitations on a REIT’s ownership of a tenant or an operator,” Warren wrote. “
Meanwhile, Warren said taxable REIT subsidiaries (TRSs) have recently negotiated agreements with hotel operators that give the TRS the right to exert significant control over labor terms.
“As the IRS continues to identify massive corporations and businesses that may be violating tax law, I urge you to increase enforcement scrutiny of REITs, especially large health and hospitality REITs that may be illegally claiming significant tax breaks while meddling in the operations of their tenants. Decades-long underfunding of the IRS may have let bad actors feel safe to claim large REIT tax breaks while violating REIT rules, but such tax cheating should not be allowed to continue,” Warren added in the letter.