8-KOther Events

DIGITAL REALTY TRUST, INC. 8-K Report, Corporate Update (Apr 2, 2013)

Filed April 2, 2013For Securities:DLRDLR-PJDLR-PKDLR-PL

Summary

This 8-K filing by Digital Realty Trust, Inc. (DLR) on April 2, 2013, primarily serves to update investors on United States Federal Income Tax considerations. The most significant update pertains to proposed Treasury Regulations that, if finalized, would exclude gains from like-kind exchanges (Section 1031) or involuntary conversions (Section 1033) from a potential built-in gains tax. This is a positive development, as it potentially shields DLR from corporate tax on certain asset dispositions made after acquiring them from a C corporation with a tax basis below fair market value. The filing also clarifies the annual distribution requirements for REITs to maintain their status, superseding previous guidance. DLR must distribute at least 90% of its REIT taxable income and 90% of its after-tax net income from foreclosure property, adjusted for certain non-cash income and built-in gains. Furthermore, the report updates tax rate information for non-corporate taxpayers on capital gains and qualified dividends, noting that REIT dividends generally do not qualify for the preferential 20% rate on qualified dividends, with specific exceptions. Finally, the filing provides an update on foreign account withholding tax rules (FATCA), which will begin to impact dividend payments from January 1, 2014, and gross proceeds from sales from January 1, 2017. This requires foreign financial institutions and non-US entities to undertake due diligence and reporting to avoid a 30% withholding tax. Investors, particularly those in foreign jurisdictions, should consult their tax advisors regarding these evolving tax implications.

Key Highlights

  • 1Digital Realty Trust (DLR) filed an 8-K on April 2, 2013, to provide supplemental US federal income tax information.
  • 2Proposed Treasury Regulations could exclude gains from like-kind exchanges (Section 1031) and involuntary conversions (Section 1033) from the built-in gains tax.
  • 3The filing clarifies the 90% distribution requirement for REITs to maintain their status, including adjustments for non-cash income and built-in gains.
  • 4Updates are provided on federal tax rates for non-corporate taxpayers, noting that REIT dividends generally do not qualify for the 20% qualified dividend income rate.
  • 5Information regarding the 3.8% Medicare tax on unearned income for certain individuals, estates, and trusts is updated.
  • 6FATCA (Foreign Account Tax Compliance Act) withholding tax provisions are detailed, affecting dividend payments from January 1, 2014, and sales proceeds from January 1, 2017.
  • 7The filing supersedes previously issued supplemental tax information from a June 26, 2012, 8-K.

Frequently Asked Questions

The most significant development is the mention of proposed Treasury Regulations that could exclude gains from like-kind exchanges (Section 1031) and involuntary conversions (Section 1033) from a potential built-in gains tax. If finalized, this would provide tax relief on certain asset dispositions for DLR.

This filing supersedes previous guidance by clarifying that DLR must distribute at least 90% of its REIT taxable income and 90% of its after-tax net income from foreclosure property to maintain its REIT status. These distributions are subject to adjustments based on certain non-cash income and potential built-in gains taxes.

Generally, no. The filing clarifies that dividends payable by REITs are typically not eligible for the preferential 20% tax rate on qualified dividend income, with limited exceptions. Investors may still be subject to ordinary income tax rates or a 25% rate on capital gain dividends, depending on asset characteristics and REIT designations. Additionally, certain individuals may owe an extra 3.8% Medicare tax on dividends and capital gains.

FATCA introduces a 30% withholding tax on dividends paid to foreign financial institutions and certain non-US entities unless they comply with specific diligence and reporting requirements. This withholding will generally apply to dividend payments made on or after January 1, 2014, and to gross proceeds from sales on or after January 1, 2017. Foreign investors should consult their tax advisors for detailed guidance.