IRS Issues Proposed Regulations on the Definition of Real Property for Purposes of the Real Estate Investment Trust Provisions of the Code: Proposed Regulations Provide Guidance on the Definition of Real Property for Purposes of the Real Estate Investment Trust Provisions of the Code

Sullivan & Cromwell LLP - May 14, 2014
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On May 9, 2014, the Internal Revenue Service (“IRS”) issued proposed regulations (the “Proposed Regulations”) that provide guidance on what assets may qualify as real estate assets for purposes of determining whether a corporation qualifies as a real estate investment trust, or a “REIT,” for U.S. federal income tax purposes.  The issuance of the Proposed Regulations is significant because the IRS recently ended a moratorium on issuing rulings relating to the qualification of certain assets as “real estate” for purposes of the REIT rules while the IRS conducted an internal review of the relevant issues.  The moratorium and study apparently related to the qualification of certain types of assets not traditionally held by REITs such as billboards, data centers and secure storage facilities.

While the Proposed Regulations provide guidance for purposes of the REIT asset tests, the Proposed Regulations do not address whether certain types of income received in respect of the use of the assets would qualify as “good” income for purposes of the REIT qualification rules.

There are additional Code provisions for which the definition of real estate assets is relevant (for instance, for purposes of depreciation and the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”)).  The Proposed Regulations, however, are limited to the definition of real estate assets relating to the REIT provisions (although the preamble requests comments on reconciling the various meanings of real property).