On May 14, 2014, the Treasury Department published proposed regulations (the “Proposed Regulations”) clarifying the definition of “real property” under the real estate investment trust (“REIT”) rules. The issuance of the Proposed Regulations follows an Internal Revenue Service (“IRS”) moratorium on issuing private letter rulings (“PLRs”) with respect to REITs during which time the IRS analyzed whether recent PLRs addressing types of assets that are not directly covered by the existing regulations regarding what constitutes “real property” (which were promulgated in 1962 (the “Existing Regulations”)) and IRS published rulings issued between 1969 and 1975 (the “Early Guidance”) were consistent with the Existing Regulations and Early Guidance. In connection with that analysis, the IRS began a project to “modernize” the Existing Regulations to provide regulatory guidance for those less traditional types of property.

The Proposed Regulations expand the definition of “real property” in the Existing Regulations to include the types of property for which the IRS provided favorable rulings in the Early Guidance and the more recently issued PLRs. This guidance should be welcome for REITs seeking to invest in these types of property because a taxpayer cannot rely on a PLR received by another taxpayer. The Proposed Regulations also provide a framework for determining whether property that is not specified in the Proposed Regulations should be characterized as real property and include detailed examples illustrating the application of the framework.