On October 4, 2024, the Treasury Department released a private letter ruling (PLR 202440007, or the PLR) addressing whether a real estate investment trust (REIT) without any income and assets in its first year of operation passes its REIT gross income and asset tests. This technical issue has been a point of contention among tax advisors and is the first time that the IRS has ruled on this issue.
Background and key highlights
- A REIT is required to earn a certain percentage of “good” REIT income and hold a certain percentage of “good” REIT assets. Uncertainty surrounds whether a REIT with no income and/or no assets satisfies these tests.
- Some REITs have purchased publicly traded REIT stock, or other suitable investments, to avoid a zero income and/or asset test issue.
- The IRS looked to the legislative history of the gross income and asset tests, noting that Congress was concerned with limiting the sources of income and types of assets a REIT has, and not with ensuring whether a REIT had income and assets. The IRS also supported the position that multiplying $0 by any percentage (specifically 95 percent and 75 percent) results in $0, concluding that a lack of assets and income in Year 1 did not cause the REIT to fail the gross income and asset tests.
- The PLR provides guidance in line with what many tax advisors believe is the correct answer from both a practical and policy standpoint.
[View source.]
