Close
Close

Foreign income inclusions qualify for REIT qualification test

RFP
Tax Hot Topics newsletterThe IRS recently issued (Rev. Proc. 2018-48) which concludes that global intangible low-taxed income (GILTI) and other types of foreign income inclusions are considered qualifying income for purposes of a real estate investment trust’s (REIT) 95% gross income qualification test.

Section 856(c) provides that to qualify as a REIT, a domestic corporation must, among other things, annually satisfy the gross income requirements of Section 856(c)(2) and (c)(3). Under Section 856(c)(2), at least 95% of the corporation’s gross income must be derived from certain enumerated sources, including dividends, interest, rents from real property, and gain from the sale or other disposition of stock, securities, and real property.

Under Section 856(c)(3), at least 75% of the corporation’s gross income must be derived from a similar bur narrower set of enumerated sources, generally focused on income from real estate assets. Particularly since the addition of GILTI to the Code under Section 951A, the IRS has received requests to exercise authority to treat certain foreign income inclusions either as not constituting gross income or as qualifying gross income for purposes of Section 856(c)(2). Amounts that a REIT may be required to include in gross income under Sections 951(a)(1), 951A(a), 986(c), 1291(a), 1293(a)(1), or 1296(a) are not listed among the qualifying sources enumerated in Section 856(c)(2) or (c)(3).

Under the revenue procedure, any amounts required to be included in gross income by a REIT under Sections 951(a)(1) (except by reason of Section 965), 951A(a), 1291(a), 1293(a)(1), or 1296(a) are treated as qualifying income for purposes of Section 856(c)(2). In addition, the IRS concluded that any amounts required to be included in gross income by a REIT under Section 986(c) as foreign currency gain with respect to distributions of previously taxed earnings and profits are considered passive foreign exchange gain (as defined in Section 856(n)(3)) and, therefore, pursuant to Section 856(n)(1)(A), do not constitute gross income for purposes of Section 856(c)(2) and are excluded from the test.

Contacts
Josh Brady
Principal, Washington National Tax Office
T +1 202 521 1563

Jeff Borghino
Director, Washington National Tax Office
T +1 202 521 1532

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

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.