Real Estate Companies and Qualified Small Business Stock

Real Estate

An integral element of section 1202 of the IRC, which outlines the restrictions and benefits of Qualified Small Business Stock, is §1202(d)(4) where eligible corporations are defined. The section reads:

‘‘eligible corporation’’ means any domestic corporation; except that such term shall not:

include—(A) a DISC or former DISC, (B) a corporation with respect to which an election under section 936 is in effect or which has a direct or indirect subsidiary with respect to which such an election is in effect, (C) a regulated investment company, real estate investment trust, or REMIC, and (D) a cooperative.

I.R.C § 1202(d)(4)

In this article we will take a closer look at the definitions of real estate investment trust and real estate mortgage investment conduit for a better understanding of what corporations are disqualified from QSBS benefits.

What is a REIT (Real Estate Investment Trust)?

A REIT is a corporation that owns, operates, and/or finances income-generating real estate. Real Estate Investment Trusts combine the assets of multiple investors similar to mutual funds. This structure allows investors to earn dividends from their investments in real estate without needing to personally manage, buy, or finance property. Offering investors a flowing income with little capital appreciation to back it. 

Some Examples of REITs Include:

  • Apartment Complexes 
  • Data Centers
  • Hotels
  • Medical Facilities
  • Warehouses and many more

What is a REMIC (Real Estate Mortgage Investment Conduit)?

An REMIC is a special purpose vehicle that combines mortgage loans and issues mortgage-backed securities. Real estate mortgage investment conduits, although highly complex, can generate income for investors. They are generally exempt from direct taxation because they are deemed pass-through entities after they are dispersed, regrouped, and sold to investors as individual securities. 

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This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.

About QSBS Expert

QSBS Expert was founded by a group of entrepreneurs, investors, accountants and lawyers who came together when trying to navigate a QSBS situation of their own. We quickly realized that the regulations left a lot of open questions and the publicly available information was confusing to sift through…so we thought that others may also benefit from having a “go to” resource for all things QSBS.