Year-End Tax Planning Strategies and Updates for REITs and Real Estate Funds

Posted by Asha Shettigar, Dave Sobochan, Agata Orzechowska

As 2025 draws to a close, Real Estate Investment Trusts (REITs) and real estate funds face a critical window for tax planning, compliance and strategic decision making. This article distills the latest guidance, compliance requirements and legislative changes, empowering you to optimize your year-end actions and prepare for 2026.

Why Year-End Planning Matters for REITs

• REITs enjoy special tax treatment under the Internal Revenue Code, provided they meet strict organizational, asset, income and distribution requirements.
• Year-end planning is essential to ensure compliance with asset and income tests, meet distribution and filing deadlines, and maximize tax efficiency.
• Failing to plan can result in income and excise taxes or even loss of REIT status.

REIT-Level Taxes: What to Watch For

Even when a REIT meets all the basic requirements and deducts dividend distributions, it can still face entity-level taxes in specific situations, including:

• Prohibited Transactions: If a REIT sells property in the ordinary course of business — such as flipping condos — it faces a 100% tax on the gain from those sales. There are exceptions, but they’re limited. You can apply the safe harbor, but you must carefully plan.
• Foreclosure Property: If a REIT acquires property through loan or lease default and does not meet the 75% income test, net income from that property is taxed at 21%. It is not subject to 100% tax on income from prohibited transactions.
• Insufficient Cash Distributions: A REIT must distribute dividends equal to at least 90% of its taxable income, excluding capital gains, and any income retained is taxed at 21%. If the REIT retains capital gains, the tax it pays on such gains will pass through as a credit to its shareholders. However, if less than 85% of ordinary income and 95% of net capital gain are distributed during the year, a 4% excise tax applies to the undistributed portion. This makes accurate distribution planning crucial.

As a practical matter, most REITs distribute 100% of their taxable income to avoid any corporate level taxes.

REIT Distribution Planning: Rules and Strategies

As mentioned, REITs must distribute at least 90% of taxable income each year to maintain their tax-advantaged status and avoid excise tax penalties. If a REIT cannot distribute 90% of its taxable income by December 31 of the tax year, it has the following options to consider:

• Section 857(b)(9): Dividends declared in October, November or December and paid by January 31 of the following year are treated as if paid on December 31 of the prior year. This allows flexibility in timing distributions for compliance.
• Section 858(a) “throwback” rule: REITs can elect to treat distributions made in the following year, before filing the prior year’s tax return, as paid on December 31 of the prior year. However, you must keep in mind these are taxed to shareholders in the year paid and are not included for excise tax calculations. For 2024, if you do have a Section 858(a) dividend, you could have a different amount for dividend paid deduction and a different distribution amount for 1099 reporting.

Meeting the 90% distribution requirement doesn’t always mean distributing cash. The following options may also be available:

• Elective Stock Dividends: Listed REITs can pay dividends as a mix of cash and stock. If at least 20% of the dividend is paid in cash, the entire amount counts as a cash distribution for compliance purposes. Many REITs use an 80/20 stock-cash mix to conserve cash.
• Consent Dividends: Shareholders can agree to include a noncash consent distribution in their taxable income. This increases their basis in REIT stock and allows the REIT to deduct the distribution. Please note this is not practical strategy for public REITs and is mostly used by private REITs.

Review your distribution plan now to ensure compliance and minimize tax exposure.

Taxable Income Planning for Public REITs

Public REITs require specific tax planning strategies due to their unique structure. They typically announce the dividend per share for the following year at the end of the current year, helping investors plan for their tax obligations.

The primary focus for public REITs is to manage the character of dividend income as well as taxable income projections for the following year. The typical strategies around taxable income planning consider a few different alternatives, in which the following can be considered:

• Cost Segregation Studies: These engineering-based studies identify building components that can be depreciated over shorter periods, maximizing depreciation deductions. Note that REITs must use the Alternative Depreciation System (ADS) method for depreciation for earnings and profits (E&P) computation. Accordingly, no bonus depreciation is allowed under ADS.
• Repair Regulations: It is important to review the capitalization policy to ensure repairs and maintenance are expensed when possible, rather than capitalized. Also, there might be opportunities to recognize losses from partial disposals of tangible property. Consult with your tax advisers to file for Form 3115 if adopting or changing accounting methods.

Optimizing Tax Efficiency for REITs: Key Strategies

There are several strategies to optimize tax efficiency for REITs, including the following:

• Capital Gain Dividend Designation: Passing capital gains directly to shareholders allows the REIT to pass on the favorable long-term capital gains tax treatment to individual investors.
• Taxable REIT Subsidiaries (TRS) Management: Effective management of TRS income and expenses can improve overall tax outcomes. As enacted by the One Big Beautiful Bill Act (OBBBA), starting in 2026, REITs can hold up to 25% of their assets in TRS securities, increased from the current 20% threshold. As you plan your TRS structures, be sure to consider the increased threshold.
• Timing Income and Deductions: Properly aligning when income is recognized and when expenses are deducted can help minimize excise tax exposure.
• Additional Tax Benefits: Strategic use of charitable contributions and net operating losses (NOLs) can further reduce taxable income.
  • Charitable Contributions: REITs are generally allowed deductions for charitable contributions up to 10% of their taxable income. For tax years beginning after December 31, 2025, the OBBBA now has a new 1% floor that applies to charitable contributions for C Corporations, including REITs. This means the deduction is reduced by 1% of taxable income. Review your 2025 charitable contributions and consider accelerating planned gifts before the new 1% floor applies.
  • Net Operating Losses (NOLs): REIT NOLs can be carried forward indefinitely, but for losses arising after 2017, the deduction is limited to 80% of taxable income. Pre-2018 NOLs are not subject to this limit and should be used first.

REIT Compliance: Asset and Income Tests, and Annual Checklists

REITs must pass both asset and income tests to maintain their status as well as meet several other requirements:

• Asset Test: At least 75% of assets must be real estate, cash or government securities. There are limits on debt instruments and ownership concentration.
• Income Test: At least 75% of gross income must come from real estate sources, and 95% from real estate plus passive income like interest and dividends.
• Ownership Requirements: REITs must have at least 100 shareholders (except in their first year) and meet the 5/50 test, meaning no five shareholders can own more than 50% of the REIT. For any first year REITs this year, you have up to January 30, 2026, to meet the 100-shareholder requirement. Keep in mind even if the REIT is formed in December 2025, since REITs follow calendar year, the January 30, 2026, deadline still applies.
• Annual Checklist: Use a checklist to review all REIT qualification requirements, including organizational, income, asset and distribution tests.
• Property Management Questionnaires (PMQs): These help identify any impermissible tenant services or nonqualifying income.
• Compliance Best Practices: Maintain detailed records, conduct quarterly reviews and consult with your tax advisers regularly. Support documents such as REIT testing schedules, FIN 48 memo and PMQs may be needed by your auditors to ensure all REIT related compliance requirements are met.

REIT January Deadlines and Filings

January is a particularly active period for numerous REIT-related reporting and compliance deadlines. The following items need to be prepared, filed and distributed.

• Form 8937: This form is required for organizational actions that affect the basis of securities, such as return of capital distributions or undistributed capital gains. It must be filed within 45 days of the action or by January 15 of the following year. For any public REITs, filing is not required if, by the due date, a completed and signed Form 8937 is posted in a readily accessible format on issuer’s primary public website and kept accessible to the public on that website for 10 years.
• Shareholder Demand Letters: REITs must annually request certain shareholders to provide written statements about the actual and constructive ownership of their stock. These letters should be mailed by January 30.
• Shareholder Reporting: Form 1099-DIV must be provided to shareholders by January 31 and filed electronically with the IRS by March 31. Year-end projections are a valuable resource in preparing accurate 1099-DIV reporting in January. Additionally, note that preferred shareholders of most private REITs are managed by administrative companies and would also require a breakdown between dividends and return of capital.
• Year-End Tax Filings: Form 1120-REIT is the federal REIT tax return. For newly formed REITs, the timely filing of your first federal return on Form 1120‑REIT for the initial tax year constitutes the election to be treated as a REIT for U.S. federal income tax purposes. No separate election form is required. The election is effective for the taxable year covered by the return, provided the entity meets the qualification requirements under IRC §§ 856–859 and applicable Treasury Regulations. On the other hand, Form 8875 is used to elect Taxable REIT Subsidiary (TRS) status. The effective date of the election cannot be more than 75 days prior to the date of filing the election or more than 12 months after the date of filing the election.
  
  If a REIT (parent REIT) owns a large percentage of the stock of another REIT (subsidiary REIT), the failure of the subsidiary REIT to meet one of the REIT qualification requirements could cause the parent REIT to fail the 10% restriction for asset testing purposes. To guard against this, it is a common practice to file a protective TRS election with respect to the subsidiary REIT. This consideration is particularly important for structures with subsidiary REIT(s).
• Compliance Management: Keep a detailed tax calendar to ensure you meet all deadlines.

Legislative Updates: What’s New for REITs in 2026

The OBBBA contains numerous tax law extensions as well as new provisions that may be impactful for REITs. Key areas include permanent extension of the Qualified Business Income Deduction where eligible noncorporate taxpayers can deduct up to 20% of qualified REIT dividends. This extension can simplify decision making around entity classification when planning business structures.

The legislation also permanently extends the Sec. 163(j) modified calculation of the business interest expense limitation to EBITDA (earnings before interest, taxes, depreciation and amortization). Previously, amortization and depreciation could not be added back when applying the limitation. Extended provision will raise adjusted taxable income (ATI) for the purpose of calculating interest expense, and, as a result, additional interest expense is expected to be deductible.

Read “One Big Beautiful Bill Up Close: Tax Impact for Real Estate”

Proposed IRS/Treasury Guidance on Look-Through Rule for REITs

REITs with foreign investor participation should assess the impact of this recent development on domestically controlled REIT determination rules.

As a background, domestically controlled REITs — those with less than 50% foreign ownership — are not treated as U.S. real property interests under Foreign Investment in Real Property Tax Act (FIRPTA). Consequently, foreign investors are generally not subject to U.S. tax on the sale of REIT shares. This framework has historically led foreign investors to use U.S. blocker entities when investing in U.S. real estate structures.

The 2022 proposed and 2024 final regulations introduced a look-through rule for nonpublic domestic C Corporations with more than 50% foreign ownership, including a 10-year grandfathering period.

On October 21, 2025, the Treasury and the IRS published proposed regulations that would remove the domestic C Corporation look-through rule adopted in 2024 final regulations. Under the 2025 proposed regulations, all domestic C Corporations, public or private, are treated as non-look-through entities when determining a REIT’s “domestically controlled” status. Under these rules, a domestic C Corporation may now be wholly foreign owned without jeopardizing a REIT’s domestically controlled classification. This represents a significant development for private REITs, which are frequently formed within private investment fund structures (often involving domestic blocker corporations) or joint venture arrangements.

Taxpayers may rely on the proposed regulations immediately, and, if finalized as written, they will apply retroactively to transactions on or after April 25, 2024. This would effectively override the current regulations issued on April 24, 2024, and reinstate the prior rules.

Return of Capital (ROC) REIT Distributions to Foreign Investors

As current year’s distributions are being finalized, note that REITs are required to withhold under FIRPTA on any distribution to a foreign investor that exceeds a shareholder’s adjusted basis in accordance with Section 1445, unless an exemption applies. Accordingly, REIT return of capital (ROC) distributions are subject to FIRPTA withholding.

To mitigate or eliminate withholding on U.S. real property interests, foreign shareholders may apply for a withholding certificate using Form 8288-B. For ROC distributions, the foreign shareholder is treated as the transferor and the REIT as the transferee for purposes of this filing.

Year-End Planning for Real Estate Funds

Year-end planning for real estate funds involves projecting taxable income, analyzing the characterization and timing of gains and losses, and understanding rules that convert capital gains to ordinary income, such as recapture and Sec. 1061 rules that deal with partnership interests held in connection with performance of services.

It is also important to evaluate state nexus for new investments, including any foreign investments, and to plan for withholding for foreign partners. Consider all the foreign investment related filings with respect to any new investments, which are often missed. Consider filing any U.S. tax classification elections for foreign entities (Form 8832) with respect to any new investments.

Income Allocation and Distributions for Real Estate Funds

It is essential to estimate taxable income allocations to partners in advance and plan for tax distributions to ensure partners can meet their tax obligations. Equally important is maintaining clear communication with partners regarding the allocation methodology and the timing of distributions to promote transparency.

State and Local Tax (SALT) Planning for Real Estate Funds

State and local tax planning should include evaluating pass-through entity tax (PTET) elections as a strategy to mitigate the SALT deduction cap. It is also important to understand the distinctions between withholding and composite filings for nonresident investors and to prepare for related state filing obligations and investor notifications. Additionally, for any new partners in the fund, confirm whether residency based state filing requirements apply in the states where those partners reside.

Sec. 1061 Rules (Carried Interests)

Sec. 1061 of the Internal Revenue Code was introduced under the Tax Cuts and Jobs Act (TCJA) to change how certain partnership profits, commonly called carried interest, are taxed. These rules primarily affect fund managers and general partners in private equity, hedge funds, venture capital and real estate partnerships.

Historically, carried interest gains qualified for long-term capital gains treatment after one year. Sec. 1061 now requires a three-year holding period for assets linked to carried interest to receive long-term capital gains treatment.

If the holding period is less than three years, gains are recharacterized as short-term capital gains and taxed at ordinary income rates (up to 37%), rather than the lower long-term capital gains rate (typically 20%). The rules are complex, with detailed exceptions and anti-abuse provisions, and require careful tracking of holding periods, capital contributions and the character of partnership allocations.

The regulations clarify the treatment of tiered partnership structures, transfers to related persons and the application of the capital interest exception.

In summary, Sec. 1061 recharacterizes certain long-term capital gains allocated to holders of carried interests as short-term capital gains unless a three-year holding period is met, with specific exceptions and detailed regulatory guidance governing its application. Consider these rules in your year-end gain projections.

Partner Information documentation

Maintain accurate partner information by confirming W-8 and W-9 forms along with investor details, including address changes, transfers or partner deaths. For foreign partners, gather necessary documentation and evaluate potential treaty benefits. Ensure W-8 forms are completed correctly and that the appropriate form is on file. Additionally, remember that updated W-8 forms must be obtained from foreign investors every three years to remain compliant.

Structure Review and Document Updates

Conduct a comprehensive review of the tax structure to ensure both efficiency and compliance with applicable regulations. This process should include evaluating entity classifications, ownership arrangements and allocation methodologies to identify opportunities for optimization. Where necessary, amend partnership agreements and related documents to align with current tax requirements and strategic management objectives, ensuring consistency between operational goals and tax planning considerations.

Expense Planning for Real Estate Funds

Evaluate whether investment-related expenses should be capitalized or deducted and consider opportunities to accelerate accruals for trade or business expenses, where permissible. Coordinate closely with your tax team to confirm eligibility for deductions and ensure compliance with applicable regulations. In addition, identify potential tax planning opportunities for your portfolio companies, such as cost segregation studies to optimize depreciation, application of Sec. 163(j) interest limitation rules and leveraging repair regulations for favorable treatment.

The OBBBA permanently reinstates the 100% bonus depreciation deduction for qualified assets placed in service after January 19, 2025, with no sunset provision — unlike the TCJA rules. Please note that assets under a written, binding contract dated before January 19, 2025, do not qualify. Portfolio companies should maintain clear documentation of bonus-eligible assets to ensure compliance.

While bonus depreciation offers immediate tax efficiency, fund managers should weigh long-term implications, including:

• Potential inability to use current-year losses
• Added state tax complexity
• Future depreciation recapture exposure

Establish clear timelines for preparing taxable income estimates and issuing Schedule K-1s, and schedule planning sessions with portfolio tax teams to align strategy and execution.

Year-end is a pivotal time for REITs and real estate funds to review compliance, optimize tax positions and prepare for new legislative changes. Proactive planning and attention to deadlines can make a significant difference as you head into 2026.

Contact Asha Shettigar, Dave Sobochan, Agata Orzechowska or a member of your service team to discuss this topic further.

In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.