United States

New guidance on REIT asset tests; income tests guidance forthcoming


Real estate investment trusts (REITs) must adhere to both quarterly asset tests and annual income tests, amongst a host of other administrative requirements, to maintain the tax-advantaged REIT designation. The Treasury and the IRS recently released new final regulations regarding the definition of real property for purposes of the REIT quarterly asset tests.

As explained in our alert, the final regulations build upon the previously released proposed regulations (prior coverage) to help clarify the definition of real property, which should assist REITs with their quarterly asset test compliance. Previously, REITs often resorted to either requesting a private letter ruling (PLR) or relying informally on a PLR issued to another taxpayer in an effort to obtain some degree of certainty regarding the REIT suitability of a certain prospective (or existing) investment. Going forward, the new regulations should alleviate the need for a REIT to pursue or rely on a PLR with respect to certain assets within the framework.

For the third consecutive year, guidance clarifying the definition of REIT income for purposes of the 75-percent REIT income test (the 95-percent test is notably excluded) is included on the 2016-2017 IRS priority guidance plan. Nonetheless, the timing, form and scope of any new guidance is largely unknown.

In the meantime, REITs may be tempted to draw a connection between qualifying REIT assets under the new regulations and the income derived from such assets. In other words, it may appear safe to assume that a qualifying REIT asset would, likewise, generate qualifying REIT income. In many cases, that assumption may prove true. However, pending the issuance of new REIT income regulations, REITs should continue to rigorously apply the annual income tests based on existing guidance in conjunction with their tax advisors and counsel, where applicable.

As an aside, REITs who invest in certain healthcare assets should be aware of a separate IRS guidance project concerning the meaning of “congregate care” for purposes of defining a REIT healthcare facility. 

John Luksis

Senior Manager

John provides comprehensive tax services to real estate funds, REITs and their affiliates. Contact him at john.luksis@rsmus.com.

Areas of focus: Real EstateFederal TaxPartnership Tax Planning

How can we help you with your tax planning?

Receive our tax newsletters by Email