REIT PLR: No Assets? No Income? No Problem

Tax advisors to REITs have long pondered the metaphysical question of whether a REIT with no assets or income in its first year can pass the requisite REIT asset and income tests to qualify as a REIT. In a recent private letter ruling, the IRS responded in the affirmative.

For an entity to qualify as a REIT, at least 75% of its total assets must be "real estate" assets. Additionally, the entity must derive at least 95% of its income from certain passive sources and at least 75% of its income from certain real estate sources.

In Private Letter Ruling 202440007 (the "PLR"), a parent company formed an entity expecting to infuse it with capital shortly thereafter so that the entity could purchase specific multifamily properties. However, the parent was unable to timely transfer the capital, leaving the entity with zero assets and income at the end of the year. The entity received conflicting tax advice on whether it would qualify as a REIT with no assets or income,