Company: NXDT
Filing Date: 2025-01-30
Form Type: 424B5
Source: 0001437749-25-002263
Chunk: 29

Company: NEXPOINT DIVERSIFIED REAL ESTATE TRUST
Filing Date: 2025-01-30
Form: 424B5
Chunk 29
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 that were to occur, it would result in the amount of distributions that exceed our earnings and profits being treated first as a return of capital to the extent of the shareholder’s adjusted tax basis in the shareholder’s Series B Preferred Shares and then, to the extent of any excess over the shareholder’s adjusted tax basis in the shareholder’s Series B Preferred Shares, as capital gain. Any distribution that is treated as a return of capital will reduce the shareholder’s adjusted tax basis in the shareholder’s Series B Preferred Shares, and subsequent sales (including cash redemptions) of such shareholder’s Series B Preferred Shares will result in recognition of an increased taxable gain or reduced taxable loss due to the reduction in such adjusted tax basis.

Holders may recognize dividend income on constructive dividends without a corresponding cash payment.

Under Section 305(c) of the Code, a holder of convertible preferred stock of a corporation may be treated as having received a constructive distribution from the corporation if the conversion rate of the convertible preferred stock is adjusted (or fails to be adjusted) and as a result of such adjustment (or failure to adjust), the proportionate interest of such shareholder in the corporation’s assets or earnings and profits is increased, unless the adjustment (or failure to adjust) is made pursuant to a bona fide, reasonable anti-dilution formula. The change in the conversion rate applicable to our Series B Preferred Shares may give rise to constructive distributions under Section 305(c) of the Code. Thus, a holder may recognize income in the event of a constructive distribution even though such holder may not receive any cash or property. Under proposed regulations, such constructive distributions, if any, would generally be deemed to occur on each date an adjustment to the conversion rate is made in accordance with the terms of such Series B Preferred Shares.

Additionally, if the redemption price of a share of our Series B Preferred Shares exceeds its issue price by more than a de minimis amount, the amount of such excess may be deemed to be a constructive distribution taken into account ratably on an economic accrual basis. Such amount will be taxable as a dividend to the extent of our current and accumulated earnings and profits and will otherwise be subject to the treatment of distributions. In addition, to the extent there are accrued and unpaid dividends as of the date of redemption of our shares, the Internal Revenue Service may take the position that the amount thereof should be treated as an additional redemption premium for purposes of this analysis. Our determination of whether there is a constructive distribution for purposes of Section 305(c) of the Code is binding