In an effort to help stabilize the deteriorating housing market, Congress enacted the American Housing Rescue and Foreclosure Prevention Act of 2008 and liberalized the REIT rules. A REIT is an entity that is otherwise subject to tax as a domestic corporation, but has elected to be taxed under a preferential regime in which dividends distributed to REIT shareholders are generally deductible by the REIT. As a result, a qualifying REIT escapes the corporate level tax. To maintain REIT status, an entity is required to meet certain income and asset tests that are designed to ensure that a REIT primarily generates passive real estate related income and holds assets that primarily consist of real property. In addition, a REIT is subject to a 100% tax on its net income from the sale of property held primarily for sale to customers in the ordinary course of business (“prohibited transaction sales”), unless a sale qualifies for a safe harbor under which, among other requirements, the REIT must satisfy a four-year holding period requirement for the sold property as well as a requirement that the REIT does not sell more than seven properties during any taxable year or that the aggregate basis of real property sold during the year does not exceed 10% of the aggregate basis of all of the REIT’s assets.

The new legislation reduces the holding period requirement under the prohibited transaction safe harbor from four years to two years and amends the 10% limitation to allow calculation of the limitation by reference either to tax basis or fair market value of property. The new legislation contains several additional favorable amendments. The new REIT rules are permanent (i.e., there is no “sunset” provision) and are generally effective for tax years beginning after July 30, 2008. For more information on the new rules, please see our client alert: Congress Enacts New Laws Affecting REITs, available at http://www.mofo.com/news/updates/files/14245.html.