What is a Captive Real Estate Investment Trust?

A captive REIT refers to a REIT that's controlled by just one company and it is created for tax. This tax reduction technique is usually utilized by large banks and retailers who have many branches or stores.

How Does a Captive REIT Work?

A captive REIT is established to capitalize on tax breaks given to REITs. Two captive REIT types exist which are rental REITs and mortgage REITs. While multiple state retailers use rental REITs, large banks make use of mortgage REITs.

Captive REIT and REIT

A captive REIT refers to a REIT that is created for the purpose of tax. A real estate investment trust refers to a company possessing a minimum of its assets composed of real estate and produces gross income from rents of property. 90% of the companys taxable income must also be paid as dividend. Companies utilize captive REIT by moving their real estate to real estate investment trusts then go ahead to rent those properties from the REITs. This makes it possible for the company to decrease its income tax by subtracting rental payments. There are times when companies must take unique steps for the strategy to work. For instance, gaining the normal tax benefits afforded to real estate investment trusts requires the REIT to have a minimum of a hundred shareholders. There are situations where companies have named company executives, shareholders so as to satisfy this requirement.

Tax Benefits of Captive REIT

A captive REIT provides some beneficial tax treatments. For instance, with captive real estate investment trusts, the parent company pays rent to the real estate investment trust for individual branches or stores. Even these payments are remitted to its business entity after which the rent payments are subtracted as a result of business expenses, thus lowering the taxable income of the parent company. Another tax advantage for the parent company is the fact that dividends which the REIT paid to its owners aren't subject to corporate income tax. Thus, the parent company which gets the dividends is capable of using the dividend income in reducing state taxes.

State Law and Captive REIT

The federal government removed this flaw many years back, but big retailers like Walmart have utilized this strategy in reducing their state income taxes. Certain states have tried eliminating this tax evasion tactic, placing bans on captive REITs. That is, certain states do not allow real estate investment trust dividends to decrease taxable income. Different states have their meaning of what a captive REIT is, but broadly, it is any real estate investment trust where only one corporation owns above 50%. Some have rejected dividend payment deductions for every non-publicly traded real estate investment trust in a bid to close the captive REIT loophole.