REITs are wonky, because they’re called trusts but are really corporations. Basically Reagan’s second tax cut in 1986 created the main benefits of even pursuing a REIT, which is run kind of like a holding company where 90% of normal GAAP style net income could be distributed and the corporation would be exempt from corporate taxes, assuming they did X, Y, Z list of steps. He was big on property tax changes. This is why REITs aren’t usually levered up… there’s no tax shield on the debt, and the equity shares pay decent yields, so they can raise capital with them assuming they don’t dilute AFFO too much. Most states allow the REIT structure to bypass corporate taxes, but some might not, which could cause a DTA/L?
There was a law in 2001, called RMA, which allowed for a TRS, taxable REIT subsidiary, where the REIT owns up to 100% of the subsidiary, as long it doesn’t make up +25% of parent (REIT) assets, and the subsidiary can have a little more freedom to do things (manage property for office tenants, for example), but this sub is subjected to corporate taxes like a normal company. The idea was to make REITs more competitive vs. something like private equity, etc., etc. This is outside of the scope of this CFA exam, but might help you understand the full picture.
Also, there’s potentially something called depreciation recapture tax if you depreciate a property and then sell it for a gain above cost after converting your property set into a REIT. Also, when converting properties to the REIT election, there’s a ten-year window on capital gains taxes after the conversion.
Analysts consider the 90% distribution to be its own “tax burden,” even if the company is corp tax free. It can be a strain on managment. (This is why REIT depreciation matters even though there’s no US corporate tax, which is why I few months ago I started looking into the whole thing about the structure… The books didn’t mention this at all. Ironic, assuming you’ve read the MM stuff in the corporate finance section). I think thats the key tax issue for Level II. If you see a soft tax charge, obviously reverse it, but I doubt that will be tested since it could be pretty controversial unless super explicit.