Final regulations restore five-year recognition period for REIT built-in gains tax

On Jan. 18, the IRS released final regulations (T.D. 9810) under Section 337 that reduce the built-in gains recognition period for real estate investment trusts (REITs) from 10 to five years.

In general, a REIT that acquires property of a C corporation, either because the C corporation elected to become a REIT or because the C corporation transferred the property to the REIT in a tax-free transaction, may be subject to a REIT entity-level tax on the built-in gain upon disposition of that property during a defined period known as the REIT recognition period. Until June 2016, the REIT recognition period was defined by reference to Section 1374(d)(7)(A), which in turn defined the recognition period for the similar built-in gains tax applicable to S corporations. That statutory recognition period was historically 10 years, but was reduced to five years in December 2015 by the Protecting Americans from Tax Hikes (PATH) Act of 2015.

On June 7, 2016, the IRS released temporary regulations under Section 337 that, among other things, removed the reference to Section 1374(d)(7)(A) in the definition of the REIT recognition period and instead defined the REIT recognition period as 10 years.
In November 2016, in response to comments received concerning the temporary regulations, an IRS official publicly stated that forthcoming final regulations would revert the REIT recognition period to five years to match the shorter recognition period for S corporations. The final regulations provide that the REIT recognition period is defined by reference to Section 1374(d)(7)(A), restoring parity to built-in gains tax regimes applicable to REITs and S corps. The other provisions included in the temporary regulations were not addressed by the final regulations and remain in temporary form.

Contact Andy Cordonnier
Partner, Washington National Tax Office
+1 202 521 1502

Bryan Keith
Managing Director, Washington National Tax Office
+1 202 861 4116

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