United States

Section 355 and REITs opportunities for owner-occupied real estate


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Taxpayers have historically faced challenges when contemplating a section 355 transaction that involves a real estate investment trust holding owner-occupied real estate. For a transaction to qualify as a tax-free spin-off under section 355, numerous tests must be satisfied, three of which are of particular relevance to real estate investment trusts. The tests include: (1) an active trade or business must exist that must have been actively conducted for the five-year period ending on the transaction’s distribution date; (2) the new controlled corporation must continue that active trade or business, or a part of it, after the transaction; and (3) the transaction must have a business purpose.

In this article previously published in The Tax Adviser, authors Nick Gruidl and Parr Thomson explore the challenges and discuss the tests that must be satisfied for a transaction to qualify as a tax-free spin-off. The article also examines a potential active trade or business planning opportunity brought to light by a recent private letter ruling.