IRS rules interest is qualifying REIT income

The 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

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