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:

  1. 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.)
  2. 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.

About Jeffrey Hess

Jeffrey Hess is a Tax Partner in the Real Estate Services Group.

About Arthur Khaimov

Arthur Khaimov is a Tax Director in the Real Estate Group with over 15 years of experience providing tax consulting and compliance services to the real estate industry and other corporations.

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