Company: RWT-PA
Filing Date: 2025-01-16
Form Type: 424B5
Source: 0001104659-25-004099
Chunk: 105

Company: REDWOOD TRUST INC
Filing Date: 2025-01-16
Form: 424B5
Chunk 105
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 related property as foreclosure property.

Penalty Tax

Any redetermined deductions,
excess interest, redetermined rents or redetermined TRS service income we generate will be subject to a 100% penalty tax. In general,
redetermined deductions and excess interest represent any amounts that are deducted by a TRS of ours for amounts paid to us that are
in excess of the amounts that would have been deducted based on arm’s length negotiations, redetermined rents are rents from real
property that are overstated as a result of any services furnished to any of our tenants by a TRS of ours, and redetermined TRS service
income is income of a TRS of ours that is understated as a result of services provided to us or on our behalf.

We do not have any TRSs that
provide tenant services, and we intend to set any amounts payable to us by our TRSs at arm’s length rates. These determinations
are inherently factual, and the IRS has broad discretion to assert that amounts paid between related parties should be reallocated to
clearly reflect their respective incomes. If the IRS successfully made such an assertion, we would be required to pay a 100% penalty
tax on any overstated rents paid to us, or any excess deductions or understated income of our TRSs.

Failure to Satisfy the Gross Income Tests.

We monitor our income and
take actions intended to keep our nonqualifying income within the limitations of the gross income tests. Although we expect these actions
will be sufficient to prevent a violation of the gross income tests, we cannot guarantee that such actions will in all cases prevent
such a violation. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify
as a REIT for the year if we are entitled to relief under certain provisions of the Code. We generally may make use of the relief provisions
if:

| · | following our                                                                                                                           
 identification of the failure to meet the 75% or 95% gross income tests for any taxable year, we file a schedule with the IRS setting   
 forth each item of our gross income for purposes of the 75% or 95% gross income tests for such taxable year in accordance with Treasury 
 Regulations to be issued; and                                                                                                           |

| · | our failure                                                                     
 to meet these tests was due to reasonable cause and not due to willful neglect. |

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