Lapas attēli
PDF
ePub

unless within 30 days after the close of such quarter this discrepancy is eliminated. (Sec. 856(d)(4) (90 Stat. 1750; 26 U.S.C. 856(d)(4)); sec. 856(e)(5) (88 Stat. 2113; 26 U.S.C. 856(e)(5)); sec. 856(f)(2) (90 Stat. 1751; 26 U.S.C. 856(f)(2)); sec. 856(g)(2) (90 Stat. 1753; 26 U.S.C. 856(g)(2)); sec. 858(a) (74 Stat. 1008; 26 U.S.C. 858(a)); sec. 859(c) (90 Stat. 1743; 26 U.S.C. 859(C)); sec. 859(e) (90 Stat. 1744; 26 U.S.C. 859(e)); sec. 6001); (68A Stat. 731; 26 U.S.C. 6001); sec. 6011 (68A Stat. 732; 26 U.S.C. 6011); sec. 6071 (68A Stat. 749, 26 U.S.C. 6071); sec. 6091 (68A Stat. 752; 26 U.S.C. 6091); sec, 7805 (68A Stat. 917; 26 U.S.C. 7805), Internal Revenue Code of 1954)

[T.D. 6598, 27 FR 4083, Apr. 28, 1962 as amended by T.D. 7767, 46 FR 11265, Feb. 6, 1981)

Because of the discrepancy between the value of its various investments and the 25percent limitation in section 856(c)(5), resulting in part from the acquisition of the stock of Corporation S, Trust R, at the end of the third quarter, loses its status as a real estate investment trust. However, if Trust R, within 30 days after the close of such quarter, eliminates the discrepancy so that it meets the 25-percent limitation, the trust will be considered to have met the requirements of section 856(C)(5) at the close of the third quarter, even though the discrepancy between the value of its investment in Corporation P and the 5-percent limitation in section 856(c)(5) (resulting solely from appreciation) may still exist. If instead of acquiring stock of Corporation S, Trust R had acquired additional stock of Corporation P, then because of the discrepancy between the value of its investments and both the 5-percent and the 25-percent limitations in section 856(c)(5) resulting in part from this acquisition, trust R, at the end of the third quarter, would lose its status as a real estate investment trust, unless within 30 days after the close of such quarter both of the discrepancies are eliminated.

Example 5. If, in the previous example, the stock of Corporation P appreciates only to $10,000 during the second quarter and, in the third quarter, Trust R acquires stock of Corporation S worth $1,000, the assets as of the end of the third quarter would be as follows: Cash

$4,000 Government securities

4,000 Receivables

4,000 Real estate assets

68,000 Securities in Corporation P

10,000 Securities in Corporation O

5,000 Securities in Corporation U

5,000 Securities in Corporation T

5.000 Securities in Corporation S

1.000

$ 1.856-3 Definitions.

For purposes of the regulations under part II, subchapter M, chapter 1 of the Code, the following definitions shall apply.

(a) Value. The term “value” means, with respect to securities for which market quotations are readily available, the market value of such securities; and with respect to other securities and assets, fair value as determined in good faith by the trustees of the real estate investment trust. In the case of securities of other qualified real estate investment trusts, fair value shall not exceed market value or asset value, whichever is higher.

(b) Real estate assets-(1) In general. The term “real estate assets" means real property, interests in mortgages on real property (including interests in mortgages on leaseholds of land or improvements thereon), and shares in other qualified real estate investment trusts. The term “mortgages on real property” includes deeds of trust on real property.

(2) Treatment of REMIC interests as real estate assets-(i) In general. If, for any calendar quarter, at least 95 percent of a REMIC's assets (as determined in accordance with $1.860F4(e)(1)(ii) $1.6049–7(f)(3)) are real estate assets (as defined in paragraph (b)(1) of this section), then, for that calendar quarter, all the regular and residual interests in that REMIC are treated as real estate assets and, except as provided in paragraph (b)(2)(iii) of this section, any amount includible in gross income with respect to those

[blocks in formation]

Because the discrepancy between the value of its investment in Corporation P and the 6percent limitation in section 856(c)(5) results solely from appreciation, and because there is no discrepancy between the value of its various investments and the 25-percent limitation, Trust R, at the end of the third quarter, does not lose its status as a real estate investment trust. If, instead of acquiring stock of Corporation S, Trust R had acquired additional stock of Corporation P worth $1,000, then, because of the discrepancy between the value of its investment in Corporation P and the 5-percent limitation resulting in part from this acquisition, Trust R, at the end of the third quarter, would lose its status as a real estate investment trust,

or

interests is treated as interest on obligations secured by mortgages on real property. If less than 95 percent of a REMIC's assets are real estate assets, then the real estate investment trust is treated as holding directly its proportionate share of the assets and as receiving directly its proportionate share of the income of the REMIC. See $81.860F-4(e)(1)(ii)(B) and 1.6049–7(f)(3) for information required to be provided to regular and residual interest holders if the 95-percent test is not met.

(ii) Treatment of REMIC assets for section 856 purposes—(A) Manufactured housing treated as real estate asset. For purposes of paragraphs (b) (1) and (2) of this section, the term “real estate asset" includes manufactured housing treated as a single family residence under section 25(e)(10).

(B) Status of cash flow investments. For purposes of this paragraph (b)(2), cash flow investments (as defined in section 860G(a)(6) and $1.860G-2(g)(1)) are real estate assets.

(iii) Certain contingent interest payment obligations held by a REIT. If a REIT holds a residual interest in a REMIC for a principal purpose of avoiding the limitation set out in section 856(f) (concerning interest based on mortgagor net profits) or section 856() (concerning shared appreciation provisions), then, even if the REMIC satisfies the 95-percent test of paragraph (b)(i) of this section, the REIT is treated as receiving directly the REMIC's items of income for purposes of section 856.

(c) Interests in real property. The term "interests in real property” includes fee ownership and co-ownership of land or improvements thereon, leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon. The term also includes timeshare interests that represent an undivided fractional fee interest, or undivided leasehold interest, in real property, and that entitle the holders of the interests to the use and enjoyment of the property for a specified period of time each year. The term also includes stock held by a person as a tenant-stockholder in a cooperative housing corporation (as those terms are defined in section 216). Such

term does not, however, include mineral, oil, or gas royalty interests, such as a retained economic interest in coal or iron ore with respect to which the special provisions of section 631(c) apply.

(d) Real property. The term “real property” means land or improvements thereon, such as buildings or other inherently permanent structures thereon (including items which are structural components of such buildings or structures). In addition, the term “real property” includes interests in real property. Local law definitions will not be controlling for purposes of determining the meaning of the term "real property” as used in section 856 and the regulations thereunder. The term includes, for example, the wiring in a building, plumbing systems, central heating, central air-conditioning machinery, pipes or ducts, elevators or escalators installed in the building, or other items which are structural components of a building or other permanent structure. The term does not include assets accessory to the operation of a business, such as machinery, printing press, transportation equipment which is not a structural component of the building, office equipment, refrigerators, individual air-conditioning units, grocery counters, furnishings of a motel, hotel, or office building, etc., even though such items may be termed fixtures under local law.

(e) Securities. The term "securities" does not include “interests in real property” or “real estate assets" as those terms are defined in section 856 and this section.

(f) Qualified real estate investment trusts. The term “qualified real estate investment trust” means a real estate investment trust within the meaning of part II of subchapter M which is taxable under such part as a real estate investment trust. For purposes of the 75percent requirement in section 856(c)(5)(A), the trust whose stock has been included by another trust as "real estate assets" must be a "qualified real estate investment trust” for its full taxable year in which falls the close of each quarter of the trust's taxable year for which the computation is made. For example, Real Estate Investment

194-088 D-01--3

[ocr errors][ocr errors][ocr errors][ocr errors][ocr errors][ocr errors][merged small][ocr errors]

Trust Z for its taxable year ending De- net long-term capital gain for the taxcember 31, 1963, holds as "real estate able year over the net short-term capassets" stock in Real Estate Invest- ital loss for the taxable year. ment Trust Y, which is also on a cal

(Sec. 856(d)(4) (90 Stat. 1750; 26 U.S.C. endar year. If Trust Y is not a qualified

856(d)(4)); sec. 856(e)(5) (88 Stat. 2113; 26 real estate investment trust for its full U.S.C. 856(e)(5)); sec. 856(1)(2) (90 Stat. 1751; 26 taxable year ending December 31, 1963, U.S.C. 856(1)(2)); sec. 856(g)(2) (90 Stat. 1753; 26 Trust Z may not include the stock of U.S.C. 856(g)(2)); sec. 858(a) (74 Stat. 1008; 26 Trust Y as "real estate assets" in com- U.S.C. 858(a)); sec. 859(c) (90 Stat. 1743; 26 puting the 75-percent requirement as of

U.S.C. 859(c)); sec. 859(e) (90 Stat. 1744; 26

U.S.C. 859(e)); sec. 6001 (68A Stat. 731; 26 the close of any quarter of its taxable

U.S.C. 6001); sec. 6011 (68A Stat. 732; 26 U.S.C. year ending December 31, 1963.

6011); sec. 6071 (68A Stat. 749, 26 U.S.C. 6071); (g) Partnership interest. In the case of

sec. 6091 (68A Stat. 752; 26 U.S.C. 6091); sec. a real estate investment trust which is 7805 (68A Stat. 917; 26 U.S.C. 7805), Internal a partner in a partnership, as defined Revenue Code of 1954) in section 7701(a)(2) and the regulations

[T.D. 6598, 27 FR 4084, Apr. 28, 1962, as amendthereunder, the trust will be deemed to

ed by T.D. 6841, 30 FR 9308, July 27, 1965; T.D. own its proportionate share of each of 7767, 46 FR 11266, Feb. 6, 1981; T.D. 8458, 57 FR the assets of the partnership and will 61298, Dec. 24, 1992) be deemed to be entitled to the income of the partnership attributable to such

$ 1.8564 Rents from real property. share. For purposes of section 856, the (a) In general. Subject to the excepinterest of a partner in the partner- tions of section 856(d) and paragraph ship's assets shall be determined in ac- (b) of this section, the term “rents cordance with his capital interest in from real property” means, generally, the partnership. The character of the the gross amounts received for the use various assets in the hands of the of, or the right to use, real property of partnerhsip and items of gross income the real estate investment trust. of the partnership shall retain the (b) Amounts specifically included or ersame character in the hands of the cluded—(1) Charges for customary servpartners for all purposes of section 856. ices. For taxable years beginning after Thus, for example, if the trust owns a October 4, 1976, the term “rents from 30-percent capital interest in a partner- real property”, for purposes of paraship which owns a piece of rental prop- graphs (2) and (3) of section 856(c), inerty the trust will be treated as owning cludes charges for services customarily 30 percent of such property and as furnished or rendered in connection being entitled to 30 percent of the rent with the rental of real property, whethderived from the property by the part- er or not the charges are separately nership. Similarly, if the partnership stated. Services furnished to the tenholds any property primarily for sale ants of a particular building will be to customers in the ordinary course of considered as customary if, in the geoits trade or business, the trust will be graphic market in which the building treated as holding its proportionate is located, tenants in buildings which share of such property primarily for are of a similar class (such as luxury such purpose. Also, for example, where apartment buildings) are customarily a partnership sells real property or a provided with the service. The furtrust sells its interest in a partnership nishing of water, heat, light, and airwhich owns real property, any gross in- conditioning, the cleaning of windows, come realized from such sale, to the ex- public entrances, exits, and lobbies, the tent that it is attributable to the real performance of general maintenance property, shall be deemed gross income and of janitorial and cleaning services, from the sale or disposition of real the collection of trash, and the furproperty held for either the period that nishing of elevator services, telephone the partnership has held the real prop- answering services, incidental storage erty of the period that the trust was a space, laundry equipment, watchman member of the partnership, whichever or guard services, parking facilities, is the shorter.

and swimming pool facilities are exam(h) Net capital gain. The term "net ples of services which are customarily capital gain” means the excess of the furnished to the tenants of a particular

class of buildings in many geographic accrued for the taxable year under the marketing areas. Where it is cus- similar leases of the property, by using tomary, in a particular geographic the average of the trust's aggregate admarketing area, to furnish electricity justed bases of all of the personal propor other utilities to tenants in build- erty subject to such leases, and the avings of a particular class, the sub- erage of the trust's aggregate adjusted metering of such utilities to tenants in bases of all real and personal property such buildings will be considered a cus- subject to such leases. A lease of a furtomary service. To qualify as a service nished apartment is not considered to customarily furnished, the service be substantially similar to a lease of an must be furnished or rendered to the unfurnished apartment (including an tenants of the real estate investment apartment where the trust provides trust or, primarily for the convenience only personal property, such as major or benefit of the tenant, to the guests, appliances, that is commonly provided customers, or subtenants of the tenant. by a landlord in connection with the The service must be furnished through rental of unfurnished living quarters). an independent contractor from whom (iii) Taxable years beginning before Octhe trust does not derive or receive any tober 5, 1976. In the case of taxable income. See paragraph (b)(5) of this years beginning before October 5, 1976, section. For taxable years beginning any amount of rent that is attributable before October 5, 1976, the rules in to personal property does not qualify paragraph (b)(3) of 26 CFR 1.856-4 (re- as rent from real property. vised as of April 1, 1977), relating to the (3) Disqualification of rent which defurnishing of services, shall continue to pends on income or profits of any person. apply.

Except as provided in paragraph (2) Amounts received with respect to (b)(6)(ii) of this section, no amount recertain personal property-(i) In general. ceived or accrued, directly or indiIn the case of taxable years beginning rectly, with respect to any real propafter October 4, 1976, rent attributable erty (or personal property leased to personal property that is leased under, or in connection with, real propunder, or in connection with, the lease erty) qualifies as "rents from real propof real property is treated under sec- erty" where the determination of the tion 856(d)(1)(C) as "rents from real amount depends in whole or in part on property” (and thus qualified for pur- the income or profits derived by any poses of the income source require- person from the property. However, ments) if the rent attributable to the any amount so accured or received personal property is not more than 15 shall not be excluded from the term percent of the total rent received or ac- "rents from real property" solely by crued under the lease for the taxable reason of being based on a fixed peryear. If, however, the rent attributable centage or percentages of receipts or to personal property is greater than 15 sales (whether or not receipts or sales percent of the total rent received or ac- are adjusted for returned merchandise, crued under the lease for the taxable or Federal, State, or local sales taxes). year, then the portion of the rent from Thus, for example, "rents from real the lease that is attributable to per- property” would include rents where sonal property will not qualify as the lease provides for differing percent"rents from real property”.

ages or receipts or sales from different (ii) Application. In general, the 15-per- departments or from separate floors of cent test in section 856(d)(1)(C) is ap- a retail store so long as each percentplied separately to each lease of real age is fixed at the time of entering into property. However, where the real es- the lease and a change in such percenttate investment trust rents all (or a age is not renegotiated during the term portion of all) the units in a multiple of the lease (including any renewal peunit project under substantially simi- riods of the lease, in a manner which lar leases (such as the leasing of apart- has the effect of basing the rent on inments in an apartment building or come of profits. See paragraph (b)(6) of complex to individual tenants), the 15- this section for rules relating to cerpercent test may be applied with re- tain amounts received or accrued by a spect to the aggregate rent received or trust which are considered to be based

[ocr errors]

on the income or profits of a sublessee of the prime tenant. The amount received or accrued as rent for the taxable year which is based on a fixed percentage or percentages of the lessee's receipts or sales reduced by escalation receipts (including those determined under a formula clause) will qualify as "rents from real property”. Escalation receipts include amounts received by a prime tenant from subtenants by reason of an agreement that rent shall be increased to reflect all or a portion of an increase in real estate taxes, property insurance, operating costs of the prime tenant, or similar items customarily included in lease escalation clauses. Where in accordance with the terms of an agreement an amount received or accrued as rent for the taxable year includes both a fixed rental and a percentage of all or a portion of the lessee's income or profits, neither the fixed rental nor the additional amount will qualify as "rents from real property”. However, where the amount received or accrued for the taxable year under such an agreement includes only the fixed rental, the determination of which does not depend in whole or in part on the income or profits derived by the lessee, such amount may qualify as “rents from real property”. An amount received or accrued as rent for the taxable year which consists, in whole or in part, of one or more percentages of the lessee's receipts or sales in excess of determinable dollar amounts may qualify as “rents from real property”, but only if two conditions exist. First, the determinable amounts must not depend in whole or in part on the income or profits of the lessee. Second, the percentages and, in the case of leases entered into after July 7, 1978, the determinable amounts, must be fixed at the time the lease is entered into and a change in percentages and determinable amounts is not renegotiated during the term of the lease (including any renewal periods of the lease) in a manner which has the effect of basing rent on income or profits. In any event, an amount will not qualify as “rents from real property" if, considering the lease and all the surrounding circumstances, the arrangement does not conform with normal business practice but is in reality used

as a means of basing the rent on income or profits. The provisions of this subparagraph may be illustrated by the following example:

Erample. A real estate investment trust owns land underlying an office building. On January 1, 1975, the trust leases the land for 50 years to a prime tenant for an annual rental of $100x plus 20 percent of the prime tenant's annual gross receipts from the office building in excess of a fixed base amount of $5,000x and 10 percent of such gross receipts in excess of $10,000x. For this purpose the lease defines gross receipts as all amounts received by the prime tenant from occupancy tenants pursuant to leases of space in the office building reduced by the amount by which real estate taxes, property insurance, and operating costs related to the office building for a particular year exceed the amount of such items for 1974. The exclusion from gross receipts of increases since 1974 in real estate taxes, property insurance, and other expenses relating to the office building reflects the fact that the prime tenant passes on to occupancy tenants by way of a customary lease escalation provision the risk that such expenses might increase during the term of an occupancy lease. The exclusion from gross receipts of these expense escalation items will not cause the rental received by the real estate investment trust from the prime tenant to fail to qualify as "rents from real property" for purposes of section 856(c).

(4) Disqualification of amounts received from persons owned in whole or in part by the trust. “Rents from real property” does not include any amount received or accrued, directly or indirectly, from any person in which the real estate investment trust owns, at any time during the taxable year, the specified percentage or number of shares of stock (or interest in the assets or net profits) of that person. Any amount received from such person will not qualify as "rents from real property” if such person is a corporation and the trust owns 10 percent or more of the total combined voting power of all classes of its stock entitled to vote or 10 percent or more of the total number of shares of all classes of its outstanding stock, or if such person is not a corporation and the trust owns a 10-percent-or-more interest in its assets or net profits. For example, a trust leases an office building to a tenant for which it receives rent of $100,000 for the taxable year 1962. The lessee of the building subleases space to various subtenants for

« iepriekšējāTurpināt »