New guidance on impermissible tenant service income

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In Private Letter Ruling (“PLR”) 201812009 issued on December 14, 2017, the Internal Revenue Service (“IRS”) ruled that income earned by a real estate investment trust (“REIT”) for the provision of certain amenities and services to tenants of apartment buildings owned by the REIT does not give rise to impermissible tenant service income (“ITSI”) and will not cause rent received from tenants to be treated as other than rents from real property under IRC Section 856(d).


PLR 201812009 provides a number of useful updates in the ITSI area which is especially helpful given the race that many REITs find themselves in when trying to develop service offerings to help compete for tenants in the luxury apartment building rental market. 

The IRS specifically notes in its analysis that the presence of the amenities does not constitute a service and any income attributable to having the amenities available to all tenants at no cost does not cause the REIT to have income from the provision of services and therefore is not ITSI. Therefore, only the income attributable to a provision of a specific service in connection with the amenities needs to be analyzed for purposes of calculating ITSI. This distinction is particularly important given the proliferation of high-end common areas available for use by tenants such as rooftop pools and lounges. 

As for the services, the ruling implies that the services would be excluded from Unrelated Business Taxable Income under IRC Section 512(b)(3) for purposes of whether the income is qualifying income for REIT qualification purposes. However, the IRS specifically indicated that an exempt organization providing the same services may have unrelated business taxable income under IRC Section 512(b)(3).

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Adam Feuerstein

Principal, National Real Estate Tax Technical Leader, PwC US

David Leavitt

US Real Estate Tax Technical Co-Leader, PwC US

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