REIT Tax Developments: Sears Explores Sale-Leaseback of Real Estate to REIT; Legislation May Reduce FIRPTA Impact on REITS

Sears Holding Corp. ("Sears"), the parent of Sears and Kmart, announced in a recent SEC filing that it is actively considering monetizing some of its real estate holdings by selling and leasing back certain of its real estate assets to a newly formed Real Estate Investment Trust ("REIT").

Sears' proposal could reduce its U.S. tax bill while creating a stream of rental income earned by the REIT that could escape corporate level tax. Other companies used tax-free spin-offs to move real estate off their tax books and into more tax-efficient structures, such as REITS, but House Ways and Means Chair Dave Camp (R-MI) has proposed denying the tax-free treatment of such transactions in his draft Tax Reform bill. Unlike spin-offs, he says, sale-leasebacks could generate substantial cash for the company.

In other REIT tax news, the Joint Committee on Taxation is analyzing a bill that would reduce taxes on foreign investments in REITS. Currently, under the Foreign Investors Real Property Tax Act ("FIRPTA"), foreign investors that own more than 5% of the stock of a publicly traded REIT are subject to U.S. taxation on distributions from the REIT of gains from sales of U.S. real property by the REIT and on gains from the sale of their interest in the REIT. The proposed Real Estate Investment and Jobs Act of 2014 (H.R. 5487) would increase the threshold from 5% to 10%, thereby encouraging more foreign investment in U.S. real estate.

See: Sears 8-K; H.R. 5487.For more information, please contact Dan Mulcahy or Mark Howe.