Electing to Be Taxable: Motivations to Give Up Real Estate Investment Trust (REIT) Qualification

Abstract

In the United States, a company can elect to be taxed as a real estate investment trust (REIT) by using Form 1120-REIT to file its income tax return. The benefits of qualifying as a REIT primarily include tax advantages for both the company and its shareholders. However, these benefits may be less significant for corporations with low or no taxable income or those that require more financial flexibility. In this study, I explore the motivations behind the decisions of corporations to relinquish their REIT status. My findings indicate that the cumulative abnormal returns (CARs) for REITs announcing their transition to taxable corporation status are positive but not statistically significant. Specifically, the CAR over the event window (-10, +10) is 3.38%. Additionally, I document that the REITs that make this transition tend to have smaller market capitalizations, higher financial leverage, and lower profitability compared to control REITs. Furthermore, the results suggest that any potential benefits from electing to become taxable are likely tied to enhanced financial flexibility rather than increased tax exposure.

View PDF – https://doi.org/10.53383/100425

Keywords

REIT, REIT status termination, financial flexibility, capital structure, cumulative abnormal return