With the introduction of the RIDEA structure in 2007, REITs have become an increasingly popular tax structure for senior housing. REITs offer many tax advantages, such as providing the REIT entity with a tax deduction for dividends to its shareholders, which effectively provides for a single layer of taxation rather than the double layer of taxation that is imposed on most corporations.
Another tax benefit of REITs has recently been gaining prominence. Because a REIT is treated as a corporation for federal income tax purposes, REITs can qualify for tax-free spin-offs. Last week, the IRS released Private Letter Ruling 201436033, in which the IRS held that a REIT could distribute tax-free one of its business segments to its shareholders through a newly formed subsidiary (which would itself elect to be treated as a REIT). This is just one of several recent rulings by the IRS approving such tax-free spinoffs in the law two years, and illustrates yet another tax benefit of using a REIT structure.