IRS issues favorable PLR on qualifying REIT income and assets

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August 2019

Overview

In PLR 201930003 (the PLR), the IRS ruled that floating docks owned by a Real Estate Investment Trust (REIT) are considered real estate assets and that the failure to convey to tenants a right of entry or the right to use specific space with respect to dry dock storage facilities would not cause income received from the facilities to be treated as other than rents from real property for purposes of the REIT tests. The IRS also ruled that while cabins and areas reserved for cabin guests qualify as a lodging facility at one of the facilities, the presence of these cabins at one of the properties would not cause the assets other than cabins to be treated as lodging facilities. The IRS analysis and conclusions in the PLR indicate current IRS thinking on significant REIT asset and income issues.

The takeaway

In this PLR, the IRS ruled on three unique and distinct REIT issues, providing insight on how it reached its conclusions. The IRS determined that two different types of floating docks were inherently permanent structures by applying a facts and circumstances analysis, indicating the specific factors that it used to make that determination. The IRS also ruled that income derived from dry dock storage would not be treated as other than rents from real property even though the tenants did not have a specified space (although the tenants had guaranteed a specific amount of space) and did not have access to the premises, similar to prior PLRs on storage issues. 

Finally, the IRS made a significant and novel determination that a property could be comprised of both lodging facility and non-lodging facility assets. The IRS ruled that cabins (which the IRS stated were lodging facilities) located on a marina property that also included floating docks, dry dock storage, and restaurants would not cause the entire property to be treated as a lodging facility. The IRS noted that the cabins were a separate identifiable item of property and that the assets at the property (floating docks, dry dock storage, restaurants, and cabins) were rented and used independent from each other. The IRS stated that the characterization of a separately identifiable item that is rented and used independently of the greater item of property does not dictate the characterization of the greater property; in the PLR, the location of the cabins on the property did not cause the entire property to be treated as a lodging facility.

Although a PLR may not be used by other taxpayers as precedent, this ruling indicates that the IRS may be willing to rule favorably in cases involving REITs owning similar types of assets and generating similar types of income.

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Adam Feuerstein

Principal, National Real Estate Tax Technical Leader, PwC US

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