REIT Tax Bill Boosts Subsidiary Asset Limit from 20% to 25% Starting in 2026

This bill is a technical adjustment to the tax code specifically targeting Real Estate Investment Trusts (REITs). Essentially, it raises the maximum percentage of a REIT’s total assets that can be held in its taxable REIT subsidiaries (TRSs). The current limit is 20 percent, and this legislation bumps that up to 25 percent. This change isn’t kicking in tomorrow, though; it only applies to tax years starting after December 31, 2025, meaning it will show up on the balance sheets starting in 2026.

Why REITs Use Taxable Subsidiaries

REITs are special because they generally don't pay corporate income tax, provided they distribute most of their income to shareholders. However, they aren't allowed to engage in certain business activities—like providing non-customary services to tenants or managing properties for others—if they want to keep that tax-advantaged status. That’s where the Taxable REIT Subsidiary (TRS) comes in. A TRS is a regular, tax-paying corporation that allows the REIT to handle these non-core activities, offering flexibility and keeping the main REIT structure clean for the IRS.

More Room to Maneuver

This increase from 20 percent to 25 percent gives REITs more flexibility in how they structure their assets and operations. For example, a major commercial REIT that owns shopping centers might use its TRS to run a high-tech security service or a specialized maintenance crew for its tenants. Under the old 20% rule, the REIT might have had to cap the growth of that profitable service or spin it off entirely. The new 25% limit allows them to keep more of these valuable, ancillary businesses under the main corporate umbrella, potentially leading to better integration and efficiency. While this is purely a corporate finance change, it could indirectly affect the stability and growth of the real estate companies that own the apartments, warehouses, and offices where we live and work.

The Real-World Timeline

While this is a significant procedural change for the real estate investment world, it’s not something that will affect your 2024 or 2025 tax returns. The delayed effective date—tax years beginning on or after January 1, 2026—suggests that the industry is being given ample time to plan for this structural shift. It’s a classic example of a technical tax bill that doesn't make headlines but provides meaningful operational relief and flexibility for a specific, heavily regulated industry.