The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9784) that clarify the definition of real property for purposes of real estate investment trusts—REITs.
The final regulations [PDF 259 KB] adopt regulations as proposed in May 2014 with revisions being made in response to comments received concerning the proposed regulations.
The IRS issued revenue rulings between 1969 and 1975 addressing whether certain assets qualify as real property for purposes of section 856—e.g., assets such as railroad properties, mobile home units permanently installed in a planned community, air rights over real property, interests in mortgage loans secured by total energy systems, and mortgage loans secured by microwave transmission property. The revenue rulings addressed whether the assets qualify as either real property or interests in real property under section 856.
Subsequently, REITs sought to invest in various types of assets that were not directly addressed by the regulations or the published revenue rulings, and asked for and received private letter rulings from the IRS addressing certain of these assets. Because private rulings are limited to their particular facts and may not be relied upon by taxpayers other than the taxpayer that received the letter ruling, these were not substitutes for published guidance.
The IRS and Treasury recognized the need to provide additional published guidance on the definition of real property under sections 856 through 859. Therefore, regulations were proposed in May 2014 to define real property for purposes of sections 856 through 859 by providing a framework to analyze the types of assets in which REITs seek to invest. The proposed regulations defined “real property” to include land and improvements to land (i.e., inherently permanent structures and their structural components).
In determining whether an item is an inherently permanent structure, or a structural component, the proposed regulations first test whether the item is a distinct asset (which is the unit of property to which the definitions in these proposed regulations apply).
In addition, the proposed regulations:
The preamble to the final regulations explains the comments received by the IRS and Treasury about the proposed regulations and whether the comments were adopted or rejected. The final regulations provide or clarify:
The final regulations also reflect changes to certain examples provided in the proposed regulations. For instance:
The preamble to the final regulations notes that the IRS and Treasury are considering whether additional guidance is needed to address the circumstances under which a distinct asset that serves as an IPS may produce electricity that is also sold to third parties (i.e., net metering) and qualify as a structural component of the IPS for REIT purposes. The final regulations provide guidance in such instances until the IRS issues other guidance in the Internal Revenue Bulletin.
The final regulations apply to tax years that begin after the date of publication in the Federal Register (i.e., August 31, 2016). Also, taxpayers are permitted to rely on the final regulations for periods beginning on or before the applicability date because according to the preamble these regulations are generally “a clarification of current law.” Further, today’s release clarifies that a previously issued letter ruling that is inconsistent with these regulations is revoked prospectively from the applicable date of the final regulations.
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