SECTION 5. BACKGROUND—REITS

.01 Many REITs invest in real estate loans that are secured by real property. REITs may also invest in REMIC regular or residual interests (see section 856(c)(5)(E)). .02 Section 856(a) provides that an entity shall not be considered a REIT for any taxable year unless certain requirements are satisfied. Under section 856(c)(4)(A), at the close of each quarter of its taxable year, at least 75 percent of the value of a REIT’s total assets must be represented by real estate assets, cash and cash items (including receivables), and Government securities.

.03 Section 856(c)(5)(B) provides that the term “real estate assets” means real property (including interests in real property and interests in mortgages on real property) and shares (or transferable certificates of beneficial interest) in other REITs that meet the requirements of sections 856 through 859. Section 1.856–3(d)

1 Both §§ 1.860F–4(e)(1)(ii)(A) and § 1.860F–4(e)(1)(ii)(B) refer to former section 856(c)(6)(B), and § 1.860F–4(e)(1)(ii)(B)(1) refers to former section 856(c)(5)(A). Section 1255 of the Taxpayer Relief Act of 1997 (P.L. 105–34) redesignated former sections 856(c)(6)(B) and 856(c)(5)(A) as current sections 856(c)(5)(B) and 856(c)(4)(A), respectively.

January 17, 2012 297 2012–3 I.R.B.

of holding the interest, its proportionate share of the eligible REMIC’s assets under section 856(c)(5)(E) produces a higher percentage for purposes of section 856(c)(4)(A), then the REIT may use that higher percentage.

.02 Any amount includible by the REIT in gross income with respect to the regular or residual interest may be treated as 80 percent derived from interest on an obligation secured by a mortgage on real property within the meaning of section 856(c)(3)(B). If the REIT has information establishing that, as a result of holding the interest, its proportionate share of the eligible REMIC’s income under section 856(c)(5)(E) produces a higher percentage for purposes of section 856(c)(3), then the REIT may use that higher percentage.