A Clinton Administration proposal could surface in Congress and abolish the use of real estate investment trusts to house mortgage investments and avoid some state taxes, closing what some consider a loophole.

(With the exception of Connecticut, states tax REIT dividends at a lower rate than they tax the interest that would accrue from the mortgages if they were not in the REIT.)

The administration proposal would prohibit any entity from owning more than 50% of a REIT's stock and thus controlling a REIT subsidiary to avoid state taxes.

An experienced tax attorney said the proposal is supported by both Democrats and Republicans and the administration estimates it would raise $75 million in revenues over five years.The attorney said any such revenue raiser would likely receive serious consideration during the congressional budget process.

He noted that the House Budget Committee will likely meet July 16 to consider related budgetary matters, and the Senate Finance Committee will meet on July 23. This revenue raiser could come up at either session, he said.

However, any prohibition is expected to be "perspective," so REITs already in existence could still continue, but 50% ownership would not be allowed in the future. - ES

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