Virginia Issues Guidance on REIT Income Subtraction

Guidelines have been established for the subtraction for income attributable to an investment in a Virginia real estate investment trust (REIT). The investment must be made after 2018, and before 2025. The subtraction applies to corporate and personal income tax.

What is a Virginia REIT?

A Virginia REIT is a real estate investment trust that has been certified by the Virginia Department of Taxation as having invested:

– at least 90% of trust funds in Virginia; and

– at least 40% of trust funds in real estate in localities that are distressed or double distressed.

A locality is considered to be “distressed” if it meets any of the following criteria:

– an annual unemployment rate greater than the final statewide average unemployment rate for that calendar year; or

– a poverty rate that exceeds the statewide average poverty rate for that year.

A locality is considered to be “double distressed” if it meets both criteria.

What is the Subtraction Registration and Certification Process?

REITs seeking to claim the subtraction must register and be certified by the department prior to a qualifying investment being made. A registration application must be submitted to the department indicating that it plans to invest:

– at least 90% of trust funds in Virginia; and

– at least 40% of trust funds in real estate in localities that are distressed or double distressed.

Once the department determines the criteria has been met, the REIT may submit an application for certification. The taxpayer must provide documentation to demonstrate the qualifying investments have been made.

Certification is only valid for the calendar year in which it was issued. Investment funds may reapply for certification each calendar year. Applications for registration and certification must be submitted to the department no later than January 31 of the calendar year after the calendar year in which the investment fund is applying for certification as a Virginia REIT.

What are the Limitations on this Subtraction?

A subtraction is not permitted against personal income taxes:

– for an investment in a trust that is managed by a family member or an affiliate of the taxpayer; when the subtraction for certain long-term capital gains is claimed for the same investment;

– when the subtraction for investments in Virginia venture capital accounts is claimed for the same investment; or

– when the qualified equity and subordinated debt investments tax credit is claimed for the same investment.

A subtraction is not permitted against corporate income taxes:

– for an investment in a trust that is managed by an affiliate of the taxpayer;

– when the subtraction for certain long-term capital gains is claimed for the same investment; or

– when the subtraction for investments in Virginia venture capital accounts is claimed for the same investment.

The subtraction is allowed to the extent it is included in federal taxable income.

Ruling of Commissioner, P.D. 18-189, Virginia Department of Taxation, December 7, 2018, ¶206-554

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CCHTaxGroup

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