Proposed regulations establish analytical framework for determining whether assets qualify as real property for purposes of the REIT rules.
On May 14, 2014, the Internal Revenue Service (IRS) published in the Federal Register proposed regulations that clarify the definition of “real property” for purposes of the real estate investment trust (REIT) rules of the Internal Revenue Code (Code). Consistent with existing REIT rules and IRS published guidance, the proposed regulations define real property to include land, inherently permanent structures and structural components. The proposed regulations provide safe harbors for determining whether certain assets are real property, as well as facts and circumstances tests for determining whether assets not listed under the safe harbors are real property. In addition, the proposed regulations identify certain types of intangible assets that are real property or interests in real property for REIT purposes.
Existing law provides only limited guidance on the meaning of real property for purposes of the REIT rules. Treasury regulations promulgated under the REIT provisions of the Code define real property as “land or improvements thereon, such as buildings or other inherently permanent structures thereon (including items which are structural components of such buildings or structures),” but do not elaborate on the meaning of these terms. As noted in the preamble to the proposed regulations, the IRS issued a handful of revenue rulings between 1969 and 1975 addressing whether certain assets qualify as real property for REIT purposes. Since then, the IRS has issued private letter rulings addressing whether various other types of assets qualify as real property for REIT purposes. However, such private letter rulings are limited to their particular facts and taxpayers other than the taxpayer that received the ruling may not rely on these rulings. Therefore, the IRS has acknowledged the need to provide additional published guidance on the definition of real property for REIT purposes. The proposed regulations are generally consistent with the positions the IRS has taken in prior rulings and taxpayers are likely to welcome the clarification of these rules.
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