Does your real estate investment trust need a Head of Tax?
Real estate investment trusts (REITs) have become a cornerstone of modern real estate investing, offering individuals and institutions access to income-generating properties without the complexities of direct ownership. However, with this accessibility comes a web of intricate tax regulations and compliance requirements. As REITs grow in scale and complexity, the question arises: does your REIT need a Head of Tax?
Understanding the tax landscape of REITs
REITs are unique corporate entities governed by specific tax rules. To qualify as a REIT under U.S. tax law, an entity must meet several organizational and operational requirements, including:
- Distributing at least 90% of taxable income to shareholders annually
- Deriving at least 75% of gross income from real estate-related sources
- Maintaining a diversified shareholder base and asset composition
These requirements allow REITs to avoid federal corporate income tax, provided they comply with the distribution mandate. Instead, income is passed through to shareholders, who pay tax at their individual rates. This structure offers tax efficiency, but also introduces complex compliance obligations that can be difficult to manage without specialized expertise.
The role of a Head of Tax in a REIT
A Head of Tax is a senior executive responsible for overseeing all tax-related matters within an organization. In the context of a REIT, this role becomes particularly critical due to the following factors:
Strategic tax planning
REITs must navigate a labyrinth of federal, state, and sometimes international tax laws. A Head of Tax ensures the trust is structured optimally to minimize tax liabilities while remaining compliant. This includes:
- Structuring acquisitions and dispositions to maximize tax efficiency
- Managing taxable REIT subsidiaries (TRSs) to isolate non-qualifying income
- Advising on cross-border investments and treaty benefits for foreign investors
Compliance and reporting
REITs are subject to rigorous reporting standards, including filing Form 1120-REIT and maintaining detailed records of income sources and asset composition. A head of tax ensures:
- Accurate and timely tax filings
- Proper classification of dividends (ordinary income, capital gains, return of capital)
- Adherence to quarterly asset and annual income tests
Risk management
Tax errors can jeopardize a REIT’s status, leading to significant penalties or loss of tax-exempt treatment. A Head of Tax mitigates these risks by:
- Conducting internal audits
- Monitoring legislative changes
- Implementing robust controls and documentation practices
Investor relations
Tax transparency is vital for investor confidence. A Head of Tax can support investor communications by:
- Explaining dividend classifications and tax implications
- Assisting with 1099-DIV reporting
- Advising on tax-efficient investment strategies for different investor profiles (e.g., tax-exempt entities, foreign investors)
When is a head of tax necessary?
Not all REITs require a dedicated Head of Tax. The decision depends on several factors:
- Size and complexity: larger REITs with diverse portfolios, international exposure, or multiple TRSs face more complex tax challenges. In such cases, a head of tax is essential to manage the scale and scope of operations
- Growth trajectory: REITs planning aggressive expansion through acquisitions or development projects benefit from strategic tax leadership. A head of tax can structure deals to optimize tax outcomes and avoid pitfalls.
- Investor base: REITs with institutional or foreign investors must navigate additional layers of tax regulation, including withholding taxes and treaty benefits. A head of tax ensures compliance and maximizes investor returns
- Regulatory environment: tax laws are constantly evolving. A head of tax stays ahead of changes, ensuring the REIT adapts proactively to new regulations, such as changes in depreciation rules or state tax reforms
Alternatives to a full-time head of tax
For smaller REITs or those in early stages, hiring a full-time Head of Tax may not be feasible. Alternatives include:
- Outsourcing to tax advisory firms: external consultants can provide strategic guidance and compliance support
- Hiring a Tax Director or Manager: a mid-level professional can handle day-to-day operations under the guidance of external advisors
- Leveraging CFO expertise: in some cases, the CFO may oversee tax functions, though this can stretch their capacity
Case for investment in tax leadership
While hiring a Head of Tax is a significant investment, the potential return is substantial. Benefits include:
- Preservation of REIT status: avoiding disqualification due to non-compliance
- Optimized tax efficiency: structuring operations to reduce tax leakage
- Enhanced investor confidence: transparent and accurate tax reporting
- Strategic agility: ability to respond quickly to regulatory changes and market opportunities
Conclusion
For REITs, the stakes are high. A misstep in compliance or planning can erode investor returns and threaten the trust’s viability.
Whether through a full-time Head of Tax or a robust combination of internal and external resources, every REIT must prioritize tax leadership. As the industry evolves, those with strong tax governance will be best positioned to thrive, attract investors, and deliver sustainable returns.
How Brewer Morris can help you find your next Head of Tax
At Brewer Morris, we have a network of world-class Heads of Tax who are open to new opportunities. If you would like to hire strategic Head of Tax for your business, please submit a brief and a member of our team will be in touch. Alternatively, if you are a Head of Tax and looking for a new role, check out our latest jobs.
