The Importance of REIT Demand Letters
January 13, 2023
By Arthur Khaimov and Jeffrey Hess
One of the record keeping requirements of being a REIT is to satisfy the requirement pertaining to annual shareholder demand letters. To maintain compliance with the rules, REITs must issue an annual shareholder demand letter to its shareholders of record to ascertain actual ownership of its stock. These letters are required to be sent to shareholders within 30 days after the close of the REIT taxable year (no later than January 30, 2023 for the 2022 tax year). A REIT is not required to send a letter to each and every shareholder – instead the REIT is required to send a number of letters based on how many shareholders the REIT has. The demand letter confirms the following from the shareholders:
- Proof of actual ownership of the stock registered in the shareholder’s name. (An actual owner of REIT's stock is the person who is required to include the dividend received on the stock in their tax return.)
- The maximum number of shares that are owned at any time during the last half of the year, factoring in the certain attribution rules as detailed in the Internal Revenue Code.
The REIT must inform the recipient of the demand letter that if they fail to comply with the demand letter, the recipient must submit with their tax return statements required by Reg. Sec. 1.857-9. The REIT must also keep a record of shareholders who fail to respond or refuse to comply in whole or in part.
Should a shareholder not comply with these rules, there is no penalty on the REIT. However, if the REIT fails to comply with its own recordkeeping rules, the penalty for non-compliance is currently $25,000, and goes as high as $50,000 for intentional disregard.