Tax insight

PLR finds deposit and legal fees from failed property sale are excluded for REIT gross income testing purposes

Insight
5 minute read
November 06, 2025

What happened?

In Private Letter Ruling 202522001 (PLR), the IRS ruled that a deposit and corresponding legal fee settlement payment received by a real estate investment trust (REIT) in connection with a failed property sale where the gain from the actual sale of the property would have been qualifying REIT income was excludable from gross income for purposes of the REIT income tests.

Why is it relevant?

The ruling provides valuable insight into how the IRS may treat certain proceeds received by a REIT in connection with a failed real estate transaction for purposes of the REIT gross income tests.

Action items to consider

REITs involved in proposed property dispositions that result in the receipt of forfeited deposits or litigation settlement awards should evaluate whether those amounts may be excluded from gross income. Since the PLR was based on the IRS’s discretionary authority, REITs also may want to consider obtaining their own ruling to confirm that treatment by the IRS depending on the REIT’s specific facts and circumstances.