October 25, 2016

New IRS Final Regulations Define "Real Property" For REIT Purposes

Related Attorney(s): Joseph K. Fletcher, III, Michael J. Chambliss

Related Practice(s): Tax

On August 30, 2016, the IRS issued final regulations clarifying the definition of "real property" for purposes of the Code's REIT provisions. One of the requirements for a REIT is that at least 75% of a REIT's total asset value must be represented by real estate assets, cash and cash items (including receivables), and government securities. Real estate assets are defined as real property and interests in real property. Thus, these new regulations are significant in determining what constitutes real property for purposes of the 75% asset test.

The final regulations provide additional guidance through a number of safe harbor tests and a discussion of the facts and circumstances to be applied where property does not fall within a safe harbor. The final regulations generally follow the approach set forth in the IRS's 2014 proposed regulations and generally apply to tax years that begin after August 31, 2016, however taxpayers may rely on the final regulations for quarters that end before the effective date.

The final regulations provide a framework that defines real property as including the following categories: land, inherently permanently structures, and structural components. In determining whether an item falls into one of these categories, the regulations first test whether the item is a "distinct asset."

The following chart sets forth the assets that are listed in safe harbors for the various categories, examples of assets that would be tested under the facts and circumstances tests, and examples of assets that would not qualify as real property under the final regulations.

While creating more certainty with respect to what types of assets are considered "real property," in some cases, these new regulations may preclude certain arguments that some tax practitioners may have been using with respect to particular assets. For example, the final regulations make clear that certain elements of pipeline distribution systems, such as meters and compressors, will be tested as distinct assets and will not qualify as real property if they serve an "active" function. In the past, taxpayers may have had more room to argue that such assets were part of the related real property assets. 

For more information, please contact one of the authors of this alert, Joseph K. Fletcher, III, Partner, at 310.556.7825 or jfletcher@glaserweil.com, or Michael J. Chambliss, Associate, at 310.282.6295 or mchambliss@glaserweil.com, or your Glaser Weil relationship attorney.

This article is intended for informational purposes only and is not intended as a substitute for legal counsel.  It does not establish, and receipt of it does not constitute, an attorney-client relationship.