IRS Expands Approved REIT Income and Asset Types | Practical Law

IRS Expands Approved REIT Income and Asset Types | Practical Law

In two recent private letter rulings, the Internal Revenue Service (IRS) allowed rotating digital displays to be included as Real Estate Investment Trust (REIT) income and ski lift towers to be considered as REIT assets for REIT income and asset qualification tests. The rulings are in alignment with proposed Treasury Regulations regarding REIT qualification tests.

IRS Expands Approved REIT Income and Asset Types

Practical Law Legal Update w-000-4091 (Approx. 4 pages)

IRS Expands Approved REIT Income and Asset Types

by Practical Law Real Estate
Published on 02 Jul 2015 • USA (National/Federal)
In two recent private letter rulings, the Internal Revenue Service (IRS) allowed rotating digital displays to be included as Real Estate Investment Trust (REIT) income and ski lift towers to be considered as REIT assets for REIT income and asset qualification tests. The rulings are in alignment with proposed Treasury Regulations regarding REIT qualification tests.
To receive favorable tax treatment from the Internal Revenue Service (IRS), Real Estate Investment Trusts (REITs) must meet certain income and asset tests. On May 29, 2015, in Private Letter Ruling 201522002, the IRS allowed the income from renting qualified outdoor advertising displays to be considered REIT income. On May 22, 2015, in Private Letter Ruling 201521006, the IRS allowed ski lift towers to qualify as REIT assets.

REIT Income and Asset Tests

To qualify for tax treatment as a REIT, the entity must derive at least 75% of its gross income from real estate-related sources. Additionally, 95% of a REIT's gross income must be passive income from real estate-related sources or qualifying interest and dividends. At least 75% of the value of a REIT's total assets must be represented by real estate assets, cash and government securities (IRC § 856(c)(3)).
For more information on REIT qualification tests, see Practice Note, REITs: Overview.

Qualified Outdoor Advertising Displays

A REIT owned outdoor advertising displays (billboards) that it leased to tenants. The REIT planned to build new digital displays that would intermittently rotate the advertisements so it could lease a single display to several tenants. The REIT sought a private letter ruling from the IRS because it planned on making an election under Section 1033(g)(3) of the Internal Revenue Code (IRC) to treat the displays as real property with the accompanying rents qualifying under the REIT gross income tests.
The private letter ruling addressed the following issues:
  • Rents from real property. The IRS noted that because outdoor advertising displays are permanently affixed to the ground or a structure and the rents derived are passive in nature, the rents from these displays qualify as good REIT gross income.
  • Services. The IRS clarified that only payments for services that are customarily furnished or rendered in connection with the rental of real property qualify as REIT gross income. Other services must be provided by an independent contractor or a taxable REIT subsidiary (TRS).
  • Cost-sharing arrangements. The private letter ruling states that any reimbursements under a cost-sharing agreement between the REIT and a TRS are not included as the REIT's gross income.

Ski Lift Towers

A REIT that owned several ski resorts sought a ruling that the ski lift towers it owned subject to triple net leases qualified as real property assets under IRC Section 856.
In holding that ski lift towers were in fact real property, the IRS noted in its private letter ruling that:
  • The ski lift towers are intended to remain in place indefinitely.
  • Removing ski lift towers is costly and time-consuming.
  • The ski lift towers are typically sold for scrap metal when removed because they are custom built for a particular location.
  • The towers stay in place on the expiration of the REIT's ground lease or occupancy permit.
  • The ski lift towers are similar in nature to transmitting and receiving towers that were allowed as real property assets in other revenue rulings.

Practical Implications

Although these rulings are not particularly surprising given the permanent and affixed nature of billboards and ski lift towers, they provide helpful guidance for REITs that are planning for future acquisitions.
In line with proposed Treasury Regulations, these rulings highlight that assets and the income derived from them count towards the REIT percentage tests when they are of an inherently permanent nature or affixed to the ground or structures.
For more information on the proposed Treasury Regulations, see Legal Update, Proposed Regulations Seek to Clarify the Definition of Real Property for REITs Testing.