IRS Proposes Raising REIT Subsidiary Asset Limit from 20% to 25%, Effective 2026

This legislation proposes a technical adjustment to the tax code affecting Real Estate Investment Trusts (REITs). Specifically, it deals with the asset test for a REIT's taxable REIT subsidiary (TRS). To keep their special tax status, REITs have to meet specific asset requirements. This bill section bumps up the limit on certain assets a TRS can hold from 20 percent to 25 percent. Think of it as giving these real estate giants a little more wiggle room in how they structure their corporate side businesses.

The Fine Print of Tax-Exempt Status

For those who don't spend their weekends reading the Internal Revenue Code, a REIT is essentially a company that owns or finances income-producing real estate. They get special tax treatment—they don't pay corporate income tax—provided they distribute most of their income to shareholders. The TRS is the subsidiary that handles non-real estate activities, like providing services to tenants or managing properties, and the TRS does pay corporate tax. The current 20 percent limit on certain assets held by the TRS was a guardrail to ensure the REIT stayed focused primarily on real estate investment.

What 5% More Flexibility Actually Means

Raising this limit to 25 percent, as detailed in Section 1, gives REITs slightly more flexibility in how they allocate assets within their corporate structure. For a major REIT, that 5 percent difference could translate into hundreds of millions of dollars they can now put into service-related businesses, technology platforms, or other non-real estate assets through the TRS without risking their entire tax-advantaged status. This is a big win for REIT management, giving them more operational freedom to diversify or offer more comprehensive services.

The Delayed Rollout

Here’s the catch: this change isn't happening tomorrow. The new 25 percent threshold will only apply to tax years that begin after December 31, 2025. This delay gives the industry plenty of time to adjust their compliance models and asset management strategies. For investors in REITs, this adjustment is mostly procedural—it helps ensure the companies you invest in remain compliant while potentially allowing them to maximize income through their subsidiaries. Ultimately, this is a highly technical amendment that relaxes a constraint on large-scale real estate investment vehicles, offering them slightly more operational breathing room starting in 2026.