Acquisitions by Real Estate Investment Trusts as a Strategy for Minimisation of Investor Tax Liability

Abstract

A key requirement for Real Estate Investment Trusts (REITs) to maintain their corporate tax-exempt status is that ninety-five percent of income must be distributed as dividends. Receipt of this income imposes a personal tax burden on shareholders. A central tenet of this research is that REIT management is motivated to reduce investors' personal taxes. This may involve reduction of before-tax income through acquisitions. Market reaction to REIT merger announcements is found to be positive and significant. The evidence developed is more consistent with abnormal returns being related to a tax advantage from acquisitions rather than gaining economies of scale.

Keywords: REITs, Acquisitions, Tax Minimisation

JEL Classification: G34, G35