From One Pocket to the Other: The Abuse of Real Estate Investment Trusts Deductions

Many large, multi-state retailers and banks have been acting as their own landlord by paying rent to themselves. Sophisticated corporate tax strategists have employed a method of avoiding state taxes by using a real estate investment trust (REIT) to own its real estate. The retailer or bank then pays rent to the REIT, which then turns the money over to a holding company. The rent money ends up back in the hands of the corporate parent, without being subject to state income tax along the way. Although this tax loophole has been closed by the federal government, the strategy is still being used to avoid taxes in several states. As states begin to take notice of corporations that avoid millions of dollars in taxes, some have employed various methods of recovering the tax funds and have taken steps to prevent corporations from avoiding taxes in the future. However, not all states have enacted effective means of closing this loophole. This summary analyzes the method of using captive REITs to avoid state tax liability, outlines the development of REITs, describes states\u27 efforts in recovering and preventing the use of REIT deductions, and advocates closing the loophole through legislation