2017 Dividend Tax Information
This information is provided to assist stockholders with tax reporting requirements related to dividend distribution of taxable income by Two Harbors Investment Corp. Stockholders should review the 2017 tax statements received from their brokerage firms or other institutions to ensure that the statements agree with the information provided below. Additionally, as each stockholder’s tax situation may be different, stockholders are encouraged to consult with their own professional tax advisor with respect to their individual tax consequences.
Tax Treatment of the Common and Preferred Distributions
The Federal income tax classification of the company’s 2017 common and preferred stock distributions as it is expected to be reported on Form 1099-DIV is set forth in the following tables. No portion of the company’s 2017 dividend distributions is expected to consist of unrelated business taxable income (UBTI), which is subject to special tax reporting for certain tax exempt investors.
The company declared dividends with respect to its Series A, Series B and Series C preferred shares on December 14, 2017. The record date for stockholders entitled to receive each of these preferred dividends was January 12, 2018. Accordingly, these preferred dividends will be taxable to stockholders in the 2018 tax year.
Pursuant to the Internal Revenue Code of 1986, as amended, dividends declared by a real estate investment trust (REIT) during the last three months of a calendar year that are payable to stockholders of record on a specified date in such three month period, but which are actually paid during January of the following calendar year, are considered paid on December 31st of the calendar year in which the dividends were declared, to the extent of the REIT’s distributable earnings and profits.
Tax Treatment of the Granite Point Stock Distribution
On November 1, 2017, the company distributed the 33,071,000 shares of Granite Point Mortgage Trust Inc. (NYSE: GPMT) (“Granite Point”) common stock it had acquired in connection with the contribution of its commercial real estate portfolio to Granite Point. Two Harbors common stockholders who were entitled to take part in this distribution received 0.094765 shares of Granite Point common stock for each share of the company’s common stock outstanding on October 20, 2017, subject to the liquidation of fractional shares for which stockholders received a payment of cash in lieu of such fractional shares.
The company reports the distribution of Granite Point common stock as a taxable distribution for U.S. federal income tax purposes. Common stockholders will be treated as receiving a distribution equal to the fair market value of the Granite Point common stock (and cash in lieu of fractional shares of such common stock) received in the distribution and will take an adjusted tax basis, for federal income tax purposes, in such shares equal to the “fair market value” of such shares based on the market price on the distribution date. For federal income tax purposes, the fair market value of the Granite Point common stock is the closing price on November 1, 2017, which was $18.78 per share.
Tax Treatment of the Reverse Stock Split
On November 1, 2017, immediately following the Granite Point common stock distribution, the company completed a one-for-two reverse stock split of the outstanding shares of Two Harbors common stock (“Reverse Stock Split”). Pursuant to the Reverse Stock Split, every two (2) shares of issued and outstanding common stock were converted into one (1) share of common stock. As a result, stockholders must allocate the aggregate tax basis in their shares held immediately prior to the Reverse Stock Split among the shares held immediately after the Reverse Stock Split (including any fractional shares for which cash was received). In addition, any stockholder who was entitled to receive a fractional share as a result of the Reverse Stock Split instead received cash in lieu thereof and was deemed for federal income tax purposes to have received and then immediately sold such fractional share for cash.
Issuers of corporate securities are required to complete Internal Revenue Service Form 8937 to report organizational actions, including reverse stock splits, that affect the basis of the securities involved in the organizational action. Stockholders are encouraged to review Form 8937 for the federal income tax treatment of the reverse stock split. The 2017 Two Harbors IRS Form 8937, Report of Organization Actions Affecting Basis of Securities, is provided below.
Nondividend Distributions Affecting Basis in Two Harbors Common Stock
The federal income tax classification of the 2017 nondividend distribution is reported on Form 1099-DIV in box 3. The nondividend distribution has the effect of reducing the basis of a stockholder’s shares of Two Harbors common stock. If a stockholder has fully recovered his, her, or its basis in their Two Harbors common stock, a nondividend distribution may be treated as a capital gain.
Issuers of corporate securities are required to complete Internal Revenue Service Form 8937 to report organizational actions, including nontaxable distributions that affect the basis of the securities involved in the organizational action. The 2017 Two Harbors IRS Form 8937, Report of Organization Actions Affecting Basis of Securities, is provided below.
Consult Your Tax Advisor
Stockholders may have additional reporting obligations to the Internal Revenue Service and/or other tax authorities.
The U.S. federal income tax treatment of holding Two Harbors common and preferred stock to any particular stockholder will depend on the stockholder’s particular tax circumstances. You are urged to consult your tax advisor regarding the U.S. federal, state, local and foreign income and other tax consequences to you, in light of your particular investment or tax circumstances, of acquiring, holding and disposing of Two Harbors common and preferred stock.
Two Harbors does not provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S., federal, state or local tax penalties. Please consult your advisor as to any tax, accounting or legal statements made herein.