Code section 856, showing amendments by Public Law 94-455 on October 10, 1976.  Amendments may have effective dates different from date of enactment.

Part of an ongoing series of posts showing the evolution of Code section 856 over time.  See list of posts here.  See previous installment here.  See next installment here.

SEC. 856. DEFINITION OF REAL ESTATE INVESTMENT TRUST.

(a) IN GENERAL.
For purposes of this subtitle, the term “real estate investment trust” means an unincorporated trust or an unincorporated a corporation, trust, or association—

(1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;
(3) which (but for the provisions of this part) would be taxable as a domestic corporation;
(4) which does not hold any property(other than foreclosure property, as defined in subsection (e)) primarily for sale to customers in the ordinary course of its trade or businessis neither (A) a financial institution to which section 585, 586, or 593 applies, nor (B) an insurance company to which subchapter L applies;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) which would not be a personal holding company (as defined in section 542) if all of its adjusted ordinary gross income (as defined in section 543(b)(2)) constituted personal holding company income (as defined in section 543); and
(7) which meets the requirements of subsection (c).

(b) DETERMINATION OF STATUS.
The conditions described in paragraphs (1) to (4), inclusive, of subsection (a) must be met during the entire taxable year, and the condition described in paragraph (5) must exist during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.

(c) LIMITATIONS.
A corporation, trust, or association shall not be considered a real estate investment trust for any taxable year unless—

(1) it files with its return for the taxable year an election to be a real estate investment trust or has made such election for a previous taxable year which began after December 31, 1960, and such election has not been terminated or revoked under subsection (g);
(2) at least 95 percent (90 percent for taxable years beginning before January 1, 1980) of its gross income (excluding gross income from prohibited transactions) is derived from—

(A) dividends;
(B) interest;
(C) rents from real property;
(D) gain from the sale or other disposition of stock, securities, and real property (including interests in real property and interests in mortgages on real property) which is not property described in section 1221(1);
(E) abatements and refunds of taxes on real property; and
(F) income and gain derived from foreclosure property (as defined in subsection (e)); and
(G) amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property);

(3) at least 75 percent of its gross income (excluding gross income from prohibited transactions) is derived from—

(A) rents from real property;
(B) interest on obligations secured by mortgages on real property or on interests in real property;
(C) gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property) which is not property described in section 1221(1);
(D) dividends or other distributions on, and gain from the sale or other disposition of, transferable shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part;
(E) abatements and refunds of taxes on real property; and
(F) income and gain derived from foreclosure property (as defined in subsection (e)); and
(G) amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property);

(4) less than 30 percent of its gross income is derived from the sale or other disposition of—

(A) stock or securities held for less than 6 9 months; and
(B) section 1221(1) property (other than foreclosure property); and
(C) real property (including interests in real property) not and interests in mortgages on real property) held for less than 4 years other than—

(i) property compulsorily or involuntarily converted within the meaning of section 1033, held for less than 4 years; and
(ii) property which is foreclosure property within the definition of section 856(e); and

(5) at the close of each quarter of the taxable year—

(A) at least 75 percent of the value of its total assets is represented by real estate assets, cash and cash items (including receivables), and Government securities; and
(B) not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A)) for purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the trust and to not more than 10 percent of the outstanding voting securities of such issuer.

A real estate investment trust which meets the requirements of this paragraph at the close of any quarter shall not lose its status as a real estate investment trust because of a discrepancy during a subsequent quarter between the value of its various investments and such requirements unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A real estate investment trust which does not meet such requirements at the close of any quarter by reason of a discrepancy existing immediately after the acquisition of any security or other property which is wholly or partly the result of such acquisition during such quarter shall not lose its status for such quarter as a real estate investment trust if such discrepancy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of applying the preceding sentence.

(6) For purposes of this part—

(A) 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, except that in the case of securities of real estate investment trusts such fair value shall not exceed market value or asset value, whichever is higher.
(B) The term “real estate assets” means real property (including interests in real property and interests in mortgages on real property) and shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part.
(C) The term “interests in real property” includes fee ownership and co-ownership of land or improvements thereon and, leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon, but does not include mineral, oil, or gas royalty interests.
(D) All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amended (15 U.S.C. 80a-1 and following).

(7) A corporation, trust, or association which fails to meet the requirements of paragraph (2) or (3), or of both such paragraphs, for any taxable year shall nevertheless be considered to have satisfied the requirements of such paragraphs for such taxable year if—

(A) the nature and amount of each item of its gross income described in such paragraphs is set forth in a schedule attached to its income tax return for such taxable year;
(B) the inclusion of any incorrect information in the schedule referred to in subparagraph (A) is not due to fraud with intent to evade tax; and
(C) the failure to meet the requirements of paragraph (2) or (3), or of both such paragraphs, is due to reasonable cause and not due to willful neglect.

(d) RENTS FROM REAL PROPERTY DEFINED.

(1) AMOUNTS INCLUDED.
For purposes of paragraphs (2) and (3) of subsection (c), the term “rents from real property” includes (subject to paragraph (2))—

(A) rents from interests in real property,
(B) charges for services customarily furnished or rendered in connection with the rental of real property, whether or not such charges are separately stated, and
(C) rent attributable to personal property which is leased under, or in connection with, a lease of real property, but only if the rent attributable to such personal property for the taxable year does not exceed 15 percent of the total rent for the taxable year attributable to both the real and personal property leased under, or in connection with, such lease.

For purposes of subparagraph (C), with respect to each lease of real property, rent attributable to personal property for the taxable year is that amount which bears the same ratio to total rent for the taxable year as the average of the adjusted bases of the personal property at the beginning and at the end of the taxable year bears to the average of the aggregate adjusted bases of both the real property and the personal property at the beginning and at the end of such taxable year.

(2) AMOUNTS EXCLUDED.
For purposes of paragraphs (2) and (3) of subsection (c), the term “rents from real property”but does not include—

(1A) except as provided in paragraph (4), any amount received or accrued, directly or indirectly, with respect to any real or personal property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that any amount so received or accrued shall not be excluded from the term “rents from real property” solely by reason of being based on a fixed percentage or percentages of receipts or sales);
(2B) any amount received or accrued directly or indirectly from any person if the real estate investment trust owns, directly or indirectly—

(Ai) in the case of any person which is a corporation, stock of such person possessing 10 percent or more of the total combined voting power of all classes of stock entitled to vote, or 10 percent or more of the total number of shares of all classes of stock of such person; or
(Bii) in the case of any person which is not a corporation, an interest of 10 percent or more in the assets or net profits of such person; and

(3C) any amount received or accrued, directly or indirectly, with respect to any real or personal property, if the real estate investment trust furnishes or renders services to the tenants of such property, or manages or operates such property, other than through an independent contractor from whom the trust itself does not derive or receive any income.

(3) INDEPENDENT CONTRACTOR DEFINED.
For purposes of this paragraphsubsection and subsection (e), the term “independent contractor” means any person—

(A) a person who does not own, directly or indirectly, more than 35 percent of the shares, or certificates of beneficial interest, in the real estate investment trust, or; and
(B) a if such person, if is a corporation, not more than 35 percent of the total combined voting power of whose stock (or 35 percent of the total shares of all classes of whose stock), or, if such person is not a corporation, not more than 35 percent of the interest in whose assets or net profits is owned, directly or indirectly, by one or more persons owning 35 percent or more of the shares or certificates of beneficial interest in the trust.

(4) SPECIAL RULE FOR CERTAIN CONTINGENT RENTS.
Where a real estate investment trust receives or accrues, with respect to real or personal property, any amount which would be excluded from the term “rents from real property” solely because the tenant of the real estate investment trust receives or accrues, directly or indirectly, from subtenants any amount the determination of which depends in whole or in part on the income or profits derived by any person from such property, only a proportionate part (determined pursuant to regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust from that tenant will be excluded from the term “rents from real property”.

(5) CONSTRUCTIVE OWNERSHIP OF STOCK.
For purposes of paragraphs (2) and (3) this subsection, the rules prescribed by section 318(a) for determining the ownership of stock shall apply in determining the ownership of stock, assets, or net profits of any person; except that “10 percent” shall be substituted for “50 percent” in subparagraph (C) of sections 318(a)(2) and 318(a)(3).

(e) SPECIAL RULES FOR FORECLOSURE PROPERTY.

(1) FORECLOSURE PROPERTY DEFINED.
For purposes of this part, the term “foreclosure property” means any real property (including interests in real property), and any personal property incident to such real property, acquired by the real estate investment trust as the result of such trust having bid in such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was default (or default was imminent) on a lease of such property or on an indebtedness which such property secured. Such term does not include property acquired by the real estate investment trust as a result of indebtedness arising from the sale or other disposition of property of the trust described in section 1221(1) which was not originally acquired as foreclosure property.

(2) GRACE PERIOD.
Except as provided in paragraph (3), property shall cease to be foreclosure property with respect to the real estate investment trust on the date which is 2 years after the date such trust acquired such property.

(3) EXTENSIONS.
If the real estate investment trust establishes to the satisfaction of the Secretary or his delegate that an extension of the grace period is necessary for the orderly liquidation of the trust’s interest in such property, the Secretary or his delegate may extend the grace period for such property. Any such extension shall be for a period of not more than 1 year, and not more than 2 extensions shall be granted with respect to any property.

(4) TERMINATION OF GRACE PERIOD IN CERTAIN CASES.
Any foreclosure property shall cease to be such on the first day (occurring on or after the day on which the real estate investment trust acquired the property) on which—

(A) a lease is entered into with respect to such property which, by its terms, will give rise to income which is not described in subsection (c)(3) (other than subparagraph (F) of such subsection), or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day which is not described in such subsection,

(B) any construction takes place on such property (other than completion of a building, or completion of any other improvement, where more than 10 percent of the construction of such building or other improvement was completed before default became imminent), or

(C) if such day is more than 90 days after the day on which such property was acquired by the real estate investment trust and the property is used in a trade or business which is conducted by the trust (other than through an independent contractor (within the meaning of section (d)(3)) from whom the trust itself does not derive or receive any income).

(5) TAXPAYER MUST MAKE ELECTION.
Property shall be treated as foreclosure property for purposes of this part only if the real estate investment trust so elects (in the manner provided in regulations prescribed by the Secretary or his delegate) on or before the due date (including any extensions of time) for filing its return of tax under this chapter for the taxable year in which such trust acquires such property. Any such election shall be irrevocable.

(f) INTEREST.
For purposes of paragraphs (2)(B) and (3)(B) of subsection (c), the term “interest” does not include any amount received or accrued, directly or indirectly, if the determination of such amount depends in whole or in part on the income or profits of any person except that:

(1) any amount so received or accrued shall not be excluded from the term “interest” solely by reason of being based on a fixed percentage or percentages of receipts or sales, and
(2) where a real estate investment trust receives or accrues any amount which would be excluded from the term “interest” solely because the debtor of the real estate investment trust receives or accrues any amount the determination of which depends in whole or in part on the income or profits of any person, only a proportionate part (determined pursuant to regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust from such debtor will be excluded from the term “interest”.

(g) TERMINATION OF ELECTION.

(1) FAILURE TO QUALIFY.
An election under subsection (c)(1) made by a corporation, trust, or association shall terminate if the corporation, trust, or association is not a real estate investment trust to which the provisions of this part apply for the taxable year with respect to which the election is made, or for any succeeding taxable year. Such termination shall be effective for the taxable year for which the corporation, trust, or association is not a real estate investment trust to which the provisions of this part apply, and for all succeeding taxable years.

(2) REVOCATION.
An election under subsection (c)(1) made by a corporation, trust, or association may be revoked by it for any taxable year after the first taxable year for which the election is effective. A revocation under this paragraph shall be effective for the taxable year in which made and for all succeeding taxable years. Such revocation must be made on or before the 90th day after the first day of the first taxable year for which the revocation is to be effective. Such revocation shall be made in such Regulations, manner as the Secretary shall prescribe by regulations.

(3) ELECTION AFTER TERMINATION OR REVOCATION.
Except as provided in paragraph (4), if a corporation, trust, or association has made an election under subsection (c) (1) and such election has been terminated or revoked under paragraph (1) or paragraph (2), such corporation, trust, or association (and any successor corporation, trust, or association) shall not be eligible to make an election under subsection (c)(1) for any taxable year prior to the fifth taxable year which begins after the first taxable year for which such termination or revocation is effective.

(4) EXCEPTION.
If the election of a corporation, trust, or association has been terminated under paragraph (1), paragraph (3) shall not apply if—

(A) the corporation, trust, or association does not willfully fail to file within the time prescribed by law an income tax return for the taxable year with respect to which the termination of the election under subsection (c)(1) occurs;
(B) the inclusion of any incorrect information in the return referred to in subparagraph (A) is not due to fraud with intent to evade tax; and
(C) the corporation, trust, or association establishes to the satisfaction of the Secretary that its failure to qualify as a real estate investment trust to which the provisions of this part apply is due to reasonable cause and not due to willful neglect.

Code section 856, showing amendments by Public Law 93-625 on January 3, 1975.  Amendments may have effective dates different from date of enactment.

Part of an ongoing series of posts showing the evolution of Code section 856 over time.  See list of posts here.  See previous installment here.  See next installment here.

SEC. 856. DEFINITION OF REAL ESTATE INVESTMENT TRUST.

(a) IN GENERAL.
For purposes of this subtitle, the term “real estate investment trust” means an unincorporated trust or an unincorporated association—

(1) which is managed by one or more trustees;
(2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;
(3) which (but for the provisions of this part) would be taxable as a domestic corporation;
(4) which does not hold any property (other than foreclosure property, as defined in subsection (e)) primarily for sale to customers in the ordinary course of its trade or business;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) which would not be a personal holding company (as defined in section 542) if all of its adjusted ordinary gross income (as defined in section 543(b)(2)) constituted personal holding company income (as defined in section 543); and
(7) which meets the requirements of subsection (c).

(b) DETERMINATION OF STATUS.
The conditions described in paragraphs (1) to (4), inclusive, of subsection (a) must be met during the entire taxable year, and the condition described in paragraph (5) must exist during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.

(c) LIMITATIONS.
A trust or association shall not be considered a real estate investment trust for any taxable year unless—

(1) it files with its return for the taxable year an election to be a real estate investment trust or has made such election for a previous taxable year which began after December 31,1960;
(2) at least 90 percent of its gross income is derived from—

(A) dividends;
(B) interest;
(C) rents from real property;
(D) gain from the sale or other disposition of stock, securities, and real property (including interests in real property and interests in mortgages on real property); and
(E) abatements and refunds of taxes on real property; and
(F) income and gain derived from foreclosure property (as defined in subsection (e));

(3) at least 75 percent of its gross income is derived from—

(A) rents from real property;
(B) interest on obligations secured by mortgages on real property or on interests in real property;
(C) gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property);
(D) dividends or other distributions on, and gain from the sale or other disposition of, transferable shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part; and
(E) abatements and refunds of taxes on real property; and
(F) income and gain derived from foreclosure property (as defined in subsection (e));

(4) less than 30 percent of its gross income is derived from the sale or other disposition of—

(A) stock or securities held for less than 6 months; and
(B) real property (including interests in real property) not compulsorily or involuntarily converted within the meaning of section 1033, held for less than 4 years; and

(5) at the close of each quarter of the taxable year—

(A) at least 75 percent of the value of its total assets is represented by real estate assets, cash and cash items (including receivables), and Government securities; and
(B) not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A)) for purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the trust and to not more than 10 percent of the outstanding voting securities of such issuer.

A real estate investment trust which meets the requirements of this paragraph at the close of any quarter shall not lose its status as a real estate investment trust because of a discrepancy during a subsequent quarter between the value of its various investments and such requirements unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A real estate investment trust which does not meet such requirements at the close of any quarter by reason of a discrepancy existing immediately after the acquisition of any security or other property which is wholly or partly the result of such acquisition during such quarter shall not lose its status for such quarter as a real estate investment trust if such discrepancy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of applying the preceding sentence.

(6) For purposes of this part—

(A) 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, except that in the case of securities of real estate investment trusts such fair value shall not exceed market value or asset value, whichever is higher.
(B) The term “real estate assets” means real property (including interests in real property and interests in mortgages on real property) and shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part.
(C) The term “interests in real property” includes fee ownership and co-ownership of land or improvements thereon and leaseholds of land or improvements thereon, but does not include mineral, oil, or gas royalty interests.
(D) All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amended.

(d) RENTS FROM REAL PROPERTY DEFINED.
For purposes of paragraphs (2) and (3) of subsection (c), the term “rents from real property” includes rents from interests in real property but does not include—

(1) any amount received or accrued, directly or indirectly, with respect to any real property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that any amount so received or accrued shall not be excluded from the term “rents from real property” solely by reason of being based on a fixed percentage or percentages of receipts or sales);
(2) any amount received or accrued directly or indirectly from any person if the real estate investment trust owns, directly or indirectly—

(A) in the case of any person which is a corporation, stock of such person possessing 10 percent or more of the total combined voting power of all classes of stock entitled to vote, or 10 percent or more of the total number of shares of all classes of stock of such person; or
(B) in the case of any person which is not a corporation, an interest of 10 percent or more in the assets or net profits of such person; and

(3) any amount received or accrued, directly or indirectly, with respect to any real property, if the real estate investment trust furnishes or renders services to the tenants of such property, or manages or operates such property, other than through an independent contractor from whom the trust itself does not derive or receive any income. For purposes of this paragraph, the term “independent contractor” means—

(A) a person who does not own, directly or indirectly, more than 35 percent of the shares, or certificates of beneficial interest, in the real estate investment trust, or
(B) a person, if a corporation, not more than 35 percent of the total combined voting power of whose stock (or 35 percent of the total shares of all classes of whose stock), or, if not a corporation, not more than 35 percent of the interest in whose assets or net profits is owned, directly or indirectly, by one or more persons owning 35 percent or more of the shares or certificates of beneficial interest in the trust.

For purposes of paragraphs (2) and (3), the rules prescribed by section 318(a) for determining the ownership of stock shall apply in determining the ownership of stock, assets, or net profits of any person; except that “10 percent” shall be substituted for “50 percent” in subparagraph (C) of sections 318(a)(2) and 318(a)(3).

(e) SPECIAL RULES FOR FORECLOSURE PROPERTY.

(1) FORECLOSURE PROPERTY DEFINED.
For purposes of this part, the term “foreclosure property” means any real property (including interests in real property), and any personal property incident to such real property, acquired by the real estate investment trust as the result of such trust having bid in such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was default (or default was imminent) on a lease of such property or on an indebtedness which such property secured.

(2) GRACE PERIOD.
Except as provided in paragraph (3), property shall cease to be foreclosure property with respect to the real estate investment trust on the date which is 2 years after the date such trust acquired such property.

(3) EXTENSIONS.
If the real estate investment trust establishes to the satisfaction of the Secretary or his delegate that an extension of the grace period is necessary for the orderly liquidation of the trust’s interest in such property, the Secretary or his delegate may extend the grace period for such property. Any such extension shall be for a period of not more than 1 year, and not more than 2 extensions shall be granted with respect to any property.

(4) TERMINATION OF GRACE PERIOD IN CERTAIN CASES.
Any foreclosure property shall cease to be such on the first day (occurring on or after the day on which the real estate investment trust acquired the property) on which—

(A) a lease is entered into with respect to such property which, by its terms, will give rise to income which is not described in subsection (c)(3) (other than subparagraph (F) of such subsection), or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day which is not described in such subsection,

(B) any construction takes place on such property (other than completion of a building, or completion of any other improvement, where more than 10 percent of the construction of such building or other improvement was completed before default became imminent), or

(C) if such day is more than 90 days after the day on which such property was acquired by the real estate investment trust and the property is used in a trade or business which is conducted by the trust (other than through an independent contractor (within the meaning of section (d)(3)) from whom the trust itself does not derive or receive any income).

(5) TAXPAYER MUST MAKE ELECTION.
Property shall be treated as foreclosure property for purposes of this part only if the real estate investment trust so elects (in the manner provided in regulations prescribed by the Secretary or his delegate) on or before the due date (including any extensions of time) for filing its return of tax under this chapter for the taxable year in which such trust acquires such property. Any such election shall be irrevocable.

Code section 856, showing amendments by Public Law 88-554 on August 31, 1964.  Amendments may have effective dates different from date of enactment.

Part of an ongoing series of posts showing the evolution of Code section 856 over time.  See list of posts here.  See previous installment here.  See next installment here.

SEC. 856. DEFINITION OF REAL ESTATE INVESTMENT TRUST.

(a) IN GENERAL.
For purposes of this subtitle, the term “real estate investment trust” means an unincorporated trust or an unincorporated association—

(1) which is managed by one or more trustees;
(2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;
(3) which (but for the provisions of this part) would be taxable as a domestic corporation;
(4) which does not hold any property primarily for sale to customers in the ordinary course of its trade or business;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) which would not be a personal holding company (as defined in section 542) if all of its adjusted ordinary gross income (as defined in section 543(b)(2)) constituted personal holding company income (as defined in section 543); and
(7) which meets the requirements of subsection (c).

(b) DETERMINATION OF STATUS.
The conditions described in paragraphs (1) to (4), inclusive, of subsection (a) must be met during the entire taxable year, and the condition described in paragraph (5) must exist during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.

(c) LIMITATIONS.
A trust or association shall not be considered a real estate investment trust for any taxable year unless—

(1) it files with its return for the taxable year an election to be a real estate investment trust or has made such election for a previous taxable year which began after December 31,1960;
(2) at least 90 percent of its gross income is derived from—

(A) dividends;
(B) interest;
(C) rents from real property;
(D) gain from the sale or other disposition of stock, securities, and real property (including interests in real property and interests in mortgages on real property); and
(E) abatements and refunds of taxes on real property;

(3) at least 75 percent of its gross income is derived from—

(A) rents from real property;
(B) interest on obligations secured by mortgages on real property or on interests in real property;
(C) gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property);
(D) dividends or other distributions on, and gain from the sale or other disposition of, transferable shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part; and
(E) abatements and refunds of taxes on real property;

(4) less than 30 percent of its gross income is derived from the sale or other disposition of—

(A) stock or securities held for less than 6 months; and
(B) real property (including interests in real property) not compulsorily or involuntarily converted within the meaning of section 1033, held for less than 4 years; and

(5) at the close of each quarter of the taxable year—

(A) at least 75 percent of the value of its total assets is represented by real estate assets, cash and cash items (including receivables), and Government securities; and
(B) not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A)) for purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the trust and to not more than 10 percent of the outstanding voting securities of such issuer.

A real estate investment trust which meets the requirements of this paragraph at the close of any quarter shall not lose its status as a real estate investment trust because of a discrepancy during a subsequent quarter between the value of its various investments and such requirements unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A real estate investment trust which does not meet such requirements at the close of any quarter by reason of a discrepancy existing immediately after the acquisition of any security or other property which is wholly or partly the result of such acquisition during such quarter shall not lose its status for such quarter as a real estate investment trust if such discrepancy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of applying the preceding sentence.

(6) For purposes of this part—

(A) 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, except that in the case of securities of real estate investment trusts such fair value shall not exceed market value or asset value, whichever is higher.
(B) The term “real estate assets” means real property (including interests in real property and interests in mortgages on real property) and shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part.
(C) The term “interests in real property” includes fee ownership and co-ownership of land or improvements thereon and leaseholds of land or improvements thereon, but does not include mineral, oil, or gas royalty interests.
(D) All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amended.

(d) RENTS FROM REAL PROPERTY DEFINED.
For purposes of paragraphs (2) and (3) of subsection (c), the term “rents from real property” includes rents from interests in real property but does not include—

(1) any amount received or accrued, directly or indirectly, with respect to any real property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that any amount so received or accrued shall not be excluded from the term “rents from real property” solely by reason of being based on a fixed percentage or percentages of receipts or sales);
(2) any amount received or accrued directly or indirectly from any person if the real estate investment trust owns, directly or indirectly—

(A) in the case of any person which is a corporation, stock of such person possessing 10 percent or more of the total combined voting power of all classes of stock entitled to vote, or 10 percent or more of the total number of shares of all classes of stock of such person; or
(B) in the case of any person which is not a corporation, an interest of 10 percent or more in the assets or net profits of such person; and

(3) any amount received or accrued, directly or indirectly, with respect to any real property, if the real estate investment trust furnishes or renders services to the tenants of such property, or manages or operates such property, other than through an independent contractor from whom the trust itself does not derive or receive any income. For purposes of this paragraph, the term “independent contractor” means—

(A) a person who does not own, directly or indirectly, more than 35 percent of the shares, or certificates of beneficial interest, in the real estate investment trust, or
(B) a person, if a corporation, not more than 35 percent of the total combined voting power of whose stock (or 35 percent of the total shares of all classes of whose stock), or, if not a corporation, not more than 35 percent of the interest in whose assets or net profits is owned, directly or indirectly, by one or more persons owning 35 percent or more of the shares or certificates of beneficial interest in the trust.

For purposes of paragraphs (2) and (3), the rules prescribed by section 318(a) for determining the ownership of stock shall apply in determining the ownership of stock, assets, or net profits of any person; except that “10 percent” shall be substituted for “50 percent” in subparagraph (C) of sections 318(a)(2) and 318(a)(3).

Code section 856, showing amendments by Public Law 88-272 on February 26, 1964.  Amendments may have effective dates different from date of enactment.

Part of an ongoing series of posts showing the evolution of Code section 856 over time.  See list of posts here.  See previous installment here.  See next installment here.

SEC. 856. DEFINITION OF REAL ESTATE INVESTMENT TRUST.

(a) IN GENERAL.
For purposes of this subtitle, the term “real estate investment trust” means an unincorporated trust or an unincorporated association—

(1) which is managed by one or more trustees;
(2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;
(3) which (but for the provisions of this part) would be taxable as a domestic corporation;
(4) which does not hold any property primarily for sale to customers in the ordinary course of its trade or business;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) which would not be a personal holding company (as defined in section 542) if all of its adjusted ordinary gross income (as defined in section 543(b)(2)) constituted personal holding company income (as defined in section 543); and
(7) which meets the requirements of subsection (c).

(b) DETERMINATION OF STATUS.
The conditions described in paragraphs (1) to (4), inclusive, of subsection (a) must be met during the entire taxable year, and the condition described in paragraph (5) must exist during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.

(c) LIMITATIONS.
A trust or association shall not be considered a real estate investment trust for any taxable year unless—

(1) it files with its return for the taxable year an election to be a real estate investment trust or has made such election for a previous taxable year which began after December 31,1960;
(2) at least 90 percent of its gross income is derived from—

(A) dividends;
(B) interest;
(C) rents from real property;
(D) gain from the sale or other disposition of stock, securities, and real property (including interests in real property and interests in mortgages on real property); and
(E) abatements and refunds of taxes on real property;

(3) at least 75 percent of its gross income is derived from—

(A) rents from real property;
(B) interest on obligations secured by mortgages on real property or on interests in real property;
(C) gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property);
(D) dividends or other distributions on, and gain from the sale or other disposition of, transferable shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part; and
(E) abatements and refunds of taxes on real property;

(4) less than 30 percent of its gross income is derived from the sale or other disposition of—

(A) stock or securities held for less than 6 months; and
(B) real property (including interests in real property) not compulsorily or involuntarily converted within the meaning of section 1033, held for less than 4 years; and

(5) at the close of each quarter of the taxable year—

(A) at least 75 percent of the value of its total assets is represented by real estate assets, cash and cash items (including receivables), and Government securities; and
(B) not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A)) for purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the trust and to not more than 10 percent of the outstanding voting securities of such issuer.

A real estate investment trust which meets the requirements of this paragraph at the close of any quarter shall not lose its status as a real estate investment trust because of a discrepancy during a subsequent quarter between the value of its various investments and such requirements unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A real estate investment trust which does not meet such requirements at the close of any quarter by reason of a discrepancy existing immediately after the acquisition of any security or other property which is wholly or partly the result of such acquisition during such quarter shall not lose its status for such quarter as a real estate investment trust if such discrepancy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of applying the preceding sentence.

(6) For purposes of this part—

(A) 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, except that in the case of securities of real estate investment trusts such fair value shall not exceed market value or asset value, whichever is higher.
(B) The term “real estate assets” means real property (including interests in real property and interests in mortgages on real property) and shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part.
(C) The term “interests in real property” includes fee ownership and co-ownership of land or improvements thereon and leaseholds of land or improvements thereon, but does not include mineral, oil, or gas royalty interests.
(D) All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amended.

(d) RENTS FROM REAL PROPERTY DEFINED.
For purposes of paragraphs (2) and (3) of subsection (c), the term “rents from real property” includes rents from interests in real property but does not include—

(1) any amount received or accrued, directly or indirectly, with respect to any real property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that any amount so received or accrued shall not be excluded from the term “rents from real property” solely by reason of being based on a fixed percentage or percentages of receipts or sales);
(2) any amount received or accrued directly or indirectly from any person if the real estate investment trust owns, directly or indirectly—

(A) in the case of any person which is a corporation, stock of such person possessing 10 percent or more of the total combined voting power of all classes of stock entitled to vote, or 10 percent or more of the total number of shares of all classes of stock of such person; or
(B) in the case of any person which is not a corporation, an interest of 10 percent or more in the assets or net profits of such person; and

(3) any amount received or accrued, directly or indirectly, with respect to any real property, if the real estate investment trust furnishes or renders services to the tenants of such property, or manages or operates such property, other than through an independent contractor from whom the trust itself does not derive or receive any income. For purposes of this paragraph, the term “independent contractor” means—

(A) a person who does not own, directly or indirectly, more than 35 percent of the shares, or certificates of beneficial interest, in the real estate investment trust, or
(B) a person, if a corporation, not more than 35 percent of the total combined voting power of whose stock (or 35 percent of the total shares of all classes of whose stock), or, if not a corporation, not more than 35 percent of the interest in whose assets or net profits is owned, directly or indirectly, by one or more persons owning 35 percent or more of the shares or certificates of beneficial interest in the trust.

For purposes of paragraphs (2) and (3), the rules prescribed by section 318(a) for determining the ownership of stock shall apply in determining the ownership of stock, assets, or net profits of any person; except that “10 percent” shall be substituted for “50 percent” in subparagraph (C) of section 318(a)(2).

It took me an embarrassingly long time to figure out what people were talking about when they referred to a “Property Manager” or an “Asset Manager” of a REIT. So what is the difference, and why is it important?

A Property Manager typically will supervise, manage, and operate one of the REIT’s real estate properties on behalf of the REIT. The Property Manager is the party that is “on the ground” at the property, interacting with tenants and handling the day-to-day operational matters that arise. For example, if the REIT owns an apartment building, the duties of the Property Manager at that property may include some or all of the following: running the leasing office, entering into leases with tenants, preparing an operating budget for approval by the REIT, operating the property within the approved operating budget subject to permitted variances, hiring and training onsite staff, repairing and maintaining the property, ensuring the property’s compliance with applicable government regulations and permits, etc. The exact scope of property management activities performed by the Property Manager will be set forth in a Property Management Agreement. If the REIT has multiple real estate properties, each property may have a different Property Manager, though it is very common for a REIT to use the same Property Manager across many or all of its real estate properties. Depending on the structure, the REIT may not be the direct owner of the real estate property. For example, the direct owner may be an operating partnership or an LLC. In such a case, the Property Management Agreement typically will be between the direct owner and the Property Manager.

An Asset Manager, also called an Investment Advisor, typically will identify and recommend new investment opportunities to the REIT and evaluate and make recommendations regarding the existing investments of the REIT. An Asset Manager concerns itself with the overall investment position of the REIT. While a Property Manager will be focused on managing and operating a particular real estate property of the REIT in a profitable manner, an Asset Manager will be focused on managing and overseeing the REIT’s portfolio of real estate properties so as to be profitable to the REIT. The exact scope of asset management activities performed by the Asset Manager will be set forth in an Asset Management Agreement. While a REIT may have many Property Managers (one for each real estate property), a REIT typically will have only a single Asset Manager, as the focus of the Asset Manager is on the overall investment portfolio of the REIT. Not all REITs have an Asset Manager. A REIT with an Asset Manager is generally referred to as “externally managed.”

We will get into why the difference between a Property Manager and an Asset Manager is so important under the REIT rules. As a slight spoiler, an Asset Manager cannot qualify as an independent contractor because of its fiduciary duty to the REIT,¹ while it is often important that a Property Manager qualify as an independent contractor.

1. Rev. Rul. 74-471, 1974-2 CB 198.

Hello and welcome to my blog about being a partnership tax geek.

Here we will dish about all kinds of juicy topics related to subchapter K of the Internal Revenue Code of 1986, as amended.  Occasionally we will spice things up with forays into qualified opportunity funds, real estate investment trusts (REITs), unrelated business taxable income (UBTI), and more.

If that does not sound remotely interesting to you, run and run fast.  Things are about to get geeky around here!