Close
Close

IRS rules interest is qualifying REIT income

RFP
Tax Hot TopicsThe IRS Office of Chief Counsel ruled in a private letter ruling (PLR 201732012) released Aug. 11 that interest received by a real estate investment trust (REIT) was qualifying income for purposes of the REIT income test under Section 856(c)(3).

Under the facts of the ruling, a REIT held property in its disregarded limited liability company (LLC) and was constructing a large residential rental building. Based on the cost of constructing the building, the REIT utilized financing options offered by a state agency. The agency issued bonds to the public and REIT would receive the proceeds of the bonds from the agency pursuant to a loan agreement.

As part of the agency’s bond resolution, the agency could direct the investment of a portion of the bond proceeds until the funds were needed by the REIT. The earnings of the bond proceeds would be applied to reduce the debt service on the bonds. Although neither the REIT nor its LLC held legal title to the investments, the LLC received a Form 1099  for the interest earned from the investments.

Under Section 856(c)(3), a REIT must derive at least 75% of its gross income from certain real estate sources and qualified temporary investment income. Section 856(c)(5)(J)(ii) provides the IRS the authority to determine that gross income is qualifying income to carry out the purposes of the REIT provisions when it would otherwise not constitute qualifying income.

In the PLR, the REIT did not expect to have the building complete and producing rental income, so it requested a ruling that the interest from the investments was qualifying income under Section 856(c)(3). The IRS ruled that the interest was qualifying income for purposes of section 856(c)(3) pursuant to the IRS’s authority in Section 856(c)(5)(J)(ii).

ContactJeff Borghino
Partner, Washington National Tax Office
T +1 202 521 1532

Lorraine White
Partner, Philadelphia Office
T +1 215 814 1728

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.