(1) Imposition of tax on real estate investment trusts There is hereby imposed for each taxable year on the real estate investment trust taxable income of every real estate investment trust a tax computed as provided in section
11, as though the real estate investment trust taxable income were the taxable income referred to in section
11.
(2) Real estate investment trust taxable income For purposes of this part, the term real estate investment trust taxable income means the taxable income of the real estate investment trust, adjusted as follows:
(A) The deductions for corporations provided in part VIII (except section
248) of subchapter B (section
241 and following, relating to the deduction for dividends received, etc.) shall not be allowed.
(B) The deduction for dividends paid (as defined in section
561) shall be allowed, but shall be computed without regard to that portion of such deduction which is attributable to the amount excluded under subparagraph (D).
(C) The taxable income shall be computed without regard to section
443 (b) (relating to computation of tax on change of annual accounting period).
(D) There shall be excluded an amount equal to the net income from foreclosure property.
(E) There shall be deducted an amount equal to the tax imposed by paragraphs (5) and (7) of this subsection, section
856 (c)(7)(C), and section
856 (g)(5) for the taxable year.
(F) There shall be excluded an amount equal to any net income derived from prohibited transactions.
(3) Capital gains
(A) Alternative tax in case of capital gains If for any taxable year a real estate investment trust has a net capital gain, then, in lieu of the tax imposed by subsection (b)(1), there is hereby imposed a tax (if such tax is less than the tax imposed by such subsection) which shall consist of the sum of
(i) a tax, computed as provided in subsection (b)(1), on the real estate investment trust taxable income (determined by excluding such net capital gain and by computing the deduction for dividends paid without regard to capital gain dividends), and
(ii) a tax determined at the rate provided in section
1201 (a) on the excess of the net capital gain over the deduction for dividends paid (as defined in section
561) determined with reference to capital gains dividends only.
(B) Treatment of capital gain dividends by shareholders
A capital gain dividend shall be treated by the shareholders or holders of beneficial interests as a gain from the sale or exchange of a capital asset held for more than 1 year.
(C) Definition of capital gain dividend For purposes of this part, a capital gain dividend is any dividend, or part thereof, which is designated by the real estate investment trust as a capital gain dividend in a written notice mailed to its shareholders or holders of beneficial interests at any time before the expiration of 30 days after the close of its taxable year (or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable year); except that, if there is an increase in the excess described in subparagraph (A)(ii) of this paragraph for such year which results from a determination (as defined in section
860 (e)), such designation may be made with respect to such increase at any time before the expiration of 120 days after the date of such determination. If the aggregate amount so designated with respect to a taxable year of the trust (including capital gain dividends paid after the close of the taxable year described in section
858) is greater than the net capital gain of the taxable year, the portion of each distribution which shall be a capital gain dividend shall be only that proportion of the amount so designated which such net capital gain bears to the aggregate amount so designated. For purposes of this subparagraph, the amount of the net capital gain for any taxable year which is not a calendar year shall be determined without regard to any net capital loss attributable to transactions after December 31 of such year, and any such net capital loss shall be treated as arising on the 1st day of the next taxable year. To the extent provided in regulations, the preceding sentence shall apply also for purposes of computing the taxable income of the real estate investment trust.
(D) Treatment by shareholders of undistributed capital gains
(i) Every shareholder of a real estate investment trust at the close of the trusts taxable year shall include, in computing his long-term capital gains in his return for his taxable year in which the last day of the trusts taxable year falls, such amount as the trust shall designate in respect of such shares in a written notice mailed to its shareholders at any time prior to the expiration of 60 days after the close of its taxable year (or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable year), but the amount so includible by any shareholder shall not exceed that part of the amount subjected to tax in subparagraph (A)(ii) which he would have received if all of such amount had been distributed as capital gain dividends by the trust to the holders of such shares at the close of its taxable year.
(ii) For purposes of this title, every such shareholder shall be deemed to have paid, for his taxable year under clause (i), the tax imposed by subparagraph (A)(ii) on the amounts required by this subparagraph to be included in respect of such shares in computing his long-term capital gains for that year; and such shareholders shall be allowed credit or refund as the case may be, for the tax so deemed to have been paid by him.
(iii) The adjusted basis of such shares in the hands of the holder shall be increased with respect to the amounts required by this subparagraph to be included in computing his long-term capital gains, by the difference between the amount of such includible gains and the tax deemed paid by such shareholder in respect of such shares under clause (ii).
(iv) In the event of such designation, the tax imposed by subparagraph (A)(ii) shall be paid by the real estate investment trust within 30 days after the close of its taxable year.
(v) The earnings and profits of such real estate investment trust, and the earnings and profits of any such shareholder which is a corporation, shall be appropriately adjusted in accordance with regulations prescribed by the Secretary.
(vi) As used in this subparagraph, the terms shares and shareholders shall include beneficial interests and holders of beneficial interests, respectively.
(E) Coordination with net operating loss provisions For purposes of section
172, if a real estate investment trust pays capital gain dividends during any taxable year, the amount of the net capital gain for such taxable year (to the extent such gain does not exceed the amount of such capital gain dividends) shall be excluded in determining
(i) the net operating loss for the taxable year, and
(ii) the amount of the net operating loss of any prior taxable year which may be carried through such taxable year under section
172 (b)(2) to a succeeding taxable year.
(F) Certain distributions In the case of a shareholder of a real estate investment trust to whom section
897 does not apply by reason of the second sentence of section
897 (h)(1), the amount which would be included in computing long-term capital gains for such shareholder under subparagraph (B) or (D) (without regard to this subparagraph)
(i) shall not be included in computing such shareholders long-term capital gains, and
(ii) shall be included in such shareholders gross income as a dividend from the real estate investment trust.
(5) Imposition of tax in case of failure to meet certain requirements If section
856 (c)(6) applies to a real estate investment trust for any taxable year, there is hereby imposed on such trust a tax in an amount equal to the greater of
(A) the excess of
(i) 95 percent of the gross income (excluding gross income from prohibited transactions) of the real estate investment trust, over
(ii) the amount of such gross income which is derived from sources referred to in section
856 (c)(2); or
(B) the excess of
(i) 75 percent of the gross income (excluding gross income from prohibited transactions) of the real estate investment trust, over
(ii) the amount of such gross income which is derived from sources referred to in section
856 (c)(3),
multiplied by a fraction the numerator of which is the real estate investment trust taxable income for the taxable year (determined without regard to the deductions provided in paragraphs (2)(B) and (2)(E), without regard to any net operating loss deduction, and by excluding any net capital gain) and the denominator of which is the gross income for the taxable year (excluding gross income from prohibited transactions; gross income and gain from foreclosure property (as defined in section 856 (e), but only to the extent such gross income and gain is not described in subparagraph (A), (B), (C), (D), (E), or (G) of section 856 (c)(3)); long-term capital gain; and short-term capital gain to the extent of any short-term capital loss).
(6) Income from prohibited transactions
(A) Imposition of tax
There is hereby imposed for each taxable year of every real estate investment trust a tax equal to 100 percent of the net income derived from prohibited transactions.
(B) Definitions For purposes of this part
(i) the term net income derived from prohibited transactions means the excess of the gain from prohibited transactions over the deductions allowed by this chapter which are directly connected with prohibited transactions;
(ii) in determining the amount of the net income derived from prohibited transactions, there shall not be taken into account any item attributable to any prohibited transaction for which there was a loss; and
(iii) the term prohibited transaction means a sale or other disposition of property described in section
1221 (a)(1) which is not foreclosure property.
(C) Certain sales not to constitute prohibited transactions For purposes of this part, the term prohibited transaction does not include a sale of property which is a real estate asset as defined in section
856 (c)(5)(B) if
(i) the trust has held the property for not less than 4 years;
(ii) aggregate expenditures made by the trust, or any partner of the trust, during the 4-year period preceding the date of sale which are includible in the basis of the property do not exceed 30 percent of the net selling price of the property;
(iii)
(I) during the taxable year the trust does not make more than 7 sales of property (other than sales of foreclosure property or sales to which section
1033 applies), or
(II) the aggregate adjusted bases (as determined for purposes of computing earnings and profits) of property (other than sales of foreclosure property or sales to which section
1033 applies) sold during the taxable year does not exceed 10 percent of the aggregate bases (as so determined) of all of the assets of the trust as of the beginning of the taxable year;
(iv) in the case of property, which consists of land or improvements, not acquired through foreclosure (or deed in lieu of foreclosure), or lease termination, the trust has held the property for not less than 4 years for production of rental income; and
(v) if the requirement of clause (iii)(I) is not satisfied, substantially all of the marketing and development expenditures with respect to the property were made through an independent contractor (as defined in section
856 (d)(3)) from whom the trust itself does not derive or receive any income.
(D) Certain sales not to constitute prohibited transactions For purposes of this part, the term prohibited transaction does not include a sale of property which is a real estate asset (as defined in section
856 (c)(5)(B)) if
(i) the trust held the property for not less than 4 years in connection with the trade or business of producing timber,
(ii) the aggregate expenditures made by the trust, or a partner of the trust, during the 4-year period preceding the date of sale which
(I) are includible in the basis of the property (other than timberland acquisition expenditures), and
(II) are directly related to operation of the property for the production of timber or for the preservation of the property for use as timberland,
do not exceed 30 percent of the net selling price of the property,
(iii) the aggregate expenditures made by the trust, or a partner of the trust, during the 4-year period preceding the date of sale which
(I) are includible in the basis of the property (other than timberland acquisition expenditures), and
(II) are not directly related to operation of the property for the production of timber, or for the preservation of the property for use as timberland,
do not exceed 5 percent of the net selling price of the property,
(iv)
(I) during the taxable year the trust does not make more than 7 sales of property (other than sales of foreclosure property or sales to which section
1033 applies), or
(II) the aggregate adjusted bases (as determined for purposes of computing earnings and profits) of property (other than sales of foreclosure property or sales to which section
1033 applies) sold during the taxable year does not exceed 10 percent of the aggregate bases (as so determined) of all of the assets of the trust as of the beginning of the taxable year,
(v) in the case that the requirement of clause (iv)(I) is not satisfied, substantially all of the marketing expenditures with respect to the property were made through an independent contractor (as defined in section
856 (d)(3)) from whom the trust itself does not derive or receive any income, and
(vi) the sales price of the property sold by the trust is not based in whole or in part on income or profits, including income or profits derived from the sale or operation of such property.
(E) Special rules In applying subparagraphs (C) and (D) the following special rules apply:
(i) The holding period of property acquired through foreclosure (or deed in lieu of foreclosure), or termination of the lease, includes the period for which the trust held the loan which such property secured, or the lease of such property.
(ii) In the case of a property acquired through foreclosure (or deed in lieu of foreclosure), or termination of a lease, expenditures made by, or for the account of, the mortgagor or lessee after default became imminent will be regarded as made by the trust.
(iii) Expenditures (including expenditures regarded as made directly by the trust, or indirectly by any partner of the trust, under clause (ii)) will not be taken into account if they relate to foreclosure property and did not cause the property to lose its status as foreclosure property.
(iv) Expenditures will not be taken into account if they are made solely to comply with standards or requirements of any government or governmental authority having relevant jurisdiction, or if they are made to restore the property as a result of losses arising from fire, storm or other casualty.
(v) The term expenditures does not include advances on a loan made by the trust.
(vi) The sale of more than one property to one buyer as part of one transaction constitutes one sale.
(vii) The term sale does not include any transaction in which the net selling price is less than $10,000.
(F) Sales not meeting requirements
In determining whether or not any sale constitutes a prohibited transaction for purposes of subparagraph (A), the fact that such sale does not meet the requirements of subparagraph (C) or (D) shall not be taken into account; and such determination, in the case of a sale not meeting such requirements, shall be made as if subparagraphs (C), (D), and (E) had not been enacted.
(7) Income from redetermined rents, redetermined deductions, and excess interest
(A) Imposition of tax
There is hereby imposed for each taxable year of the real estate investment trust a tax equal to 100 percent of redetermined rents, redetermined deductions, and excess interest.
(B) Redetermined rents
(i) In general The term redetermined rents means rents from real property (as defined in section
856 (d)) to the extent the amount of the rents would (but for subparagraph (E)) be reduced on distribution, apportionment, or allocation under section
482 to clearly reflect income as a result of services furnished or rendered by a taxable REIT subsidiary of the real estate investment trust to a tenant of such trust.
(ii) Exception for de minimis amounts Clause (i) shall not apply to amounts described in section
856 (d)(7)(A) with respect to a property to the extent such amounts do not exceed the one percent threshold described in section
856 (d)(7)(B) with respect to such property.
(iii) Exception for comparably priced services Clause (i) shall not apply to any service rendered by a taxable REIT subsidiary of a real estate investment trust to a tenant of such trust if
(I) such subsidiary renders a significant amount of similar services to persons other than such trust and tenants of such trust who are unrelated (within the meaning of section
856 (d)(8)(F)) to such subsidiary, trust, and tenants, but
(II) only to the extent the charge for such service so rendered is substantially comparable to the charge for the similar services rendered to persons referred to in subclause (I).
(iv) Exception for certain separately charged services Clause (i) shall not apply to any service rendered by a taxable REIT subsidiary of a real estate investment trust to a tenant of such trust if
(I) the rents paid to the trust by tenants (leasing at least 25 percent of the net leasable space in the trusts property) who are not receiving such service from such subsidiary are substantially comparable to the rents paid by tenants leasing comparable space who are receiving such service from such subsidiary, and
(II) the charge for such service from such subsidiary is separately stated.
(v) Exception for certain services based on subsidiarys income from the services Clause (i) shall not apply to any service rendered by a taxable REIT subsidiary of a real estate investment trust to a tenant of such trust if the gross income of such subsidiary from such service is not less than 150 percent of such subsidiarys direct cost in furnishing or rendering the service.
(vi) Exceptions granted by Secretary The Secretary may waive the tax otherwise imposed by subparagraph (A) if the trust establishes to the satisfaction of the Secretary that rents charged to tenants were established on an arms length basis even though a taxable REIT subsidiary of the trust provided services to such tenants.
(C) Redetermined deductions The term redetermined deductions means deductions (other than redetermined rents) of a taxable REIT subsidiary of a real estate investment trust to the extent the amount of such deductions would (but for subparagraph (E)) be decreased on distribution, apportionment, or allocation under section
482 to clearly reflect income as between such subsidiary and such trust.
(D) Excess interest
The term excess interest means any deductions for interest payments by a taxable REIT subsidiary of a real estate investment trust to such trust to the extent that the interest payments are in excess of a rate that is commercially reasonable.
(E) Coordination with section 482 The imposition of tax under subparagraph (A) shall be in lieu of any distribution, apportionment, or allocation under section
482.
(F) Regulatory authority
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph. Until the Secretary prescribes such regulations, real estate investment trusts and their taxable REIT subsidiaries may base their allocations on any reasonable method.
(8) Loss on sale or exchange of stock held 6 months or less
(A) In general If
(i) subparagraph (B) or (D) of paragraph (3) provides that any amount with respect to any share or beneficial interest is to be treated as a long-term capital gain, and
(ii) the taxpayer has held such share or interest for 6 months or less,
then any loss on the sale or exchange of such share or interest shall, to the extent of the amount described in clause (i), be treated as a long-term capital loss.
(B) Determination of holding periods For purposes of this paragraph, in determining the period for which the taxpayer has held any share of stock or beneficial interest
(i) the rules of paragraphs (3) and (4) of section
246 (c) shall apply, and
(ii) there shall not be taken into account any day which is more than 6 months after the date on which such share or interest becomes ex-dividend.
(C) Exception for losses incurred under periodic liquidation plans
To the extent provided in regulations, subparagraph (A) shall not apply to any loss incurred on the sale or exchange of shares of stock of, or beneficial interest in, a real estate investment trust pursuant to a plan which provides for the periodic liquidation of such shares or interests.
(9) Time certain dividends taken into account For purposes of this title, any dividend declared by a real estate investment trust in October, November, or December of any calendar year and payable to shareholders of record on a specified date in such a month shall be deemed
(A) to have been received by each shareholder on December 31 of such calendar year, and
(B) to have been paid by such trust on December 31 of such calendar year (or, if earlier, as provided in section
858).
The preceding sentence shall apply only if such dividend is actually paid by the company during January of the following calendar year.
