In PLR 202020007, the IRS ruled that (1) independent living facilities (IL Facilities) of a real estate investment trust (REIT) do not constitute health care facilities, (2) the direct or indirect operation or management of the IL Facilities by the REIT’s taxable REIT subsidiary (TRS) will not prevent the TRS from being treated as a TRS, and (3) the TRS’s engagement of an operator that is an eligible independent contractor (EIK) to provide Resident Services (defined below) does not cause the Resident Services to be considered to be rendered by the REIT, and as a result, the provision of the Resident Services will not give rise to impermissible tenant service income (ITSI) and will not cause any portion of the rents received by the REIT to fail to qualify as rents from real property. These rulings provide insight regarding how the IRS may treat REITs investing in similar types of facilities for purposes of REIT qualification.
Given the noteworthiness of this PLR with respect to independent living facilities, REITs with similar independent living facilities may want to review the service offerings at their facilities to analyze whether the facilities constitute health care facilities within the meaning of the REIT requirements, and, as a result of such analysis, whether an appropriate structure is in place. Although any such determination must be based on the specific facts and circumstances involved, the new PLR offers additional insight in how the IRS views these facilities and its rationale in determining whether a facility is a health care facility. In particular, amenities and services that are not primarily provided for the health and well-being of the residents may not cause a facility to be treated as a health care 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 holding similar types of properties with similar fact patterns.
Principal, National Real Estate Tax Technical Leader, PwC US