26 U.S.C. § 856 — Definition of real estate investment trust

Page 1975 TITLE 26—INTERNAL REVENUE CODE § 856 Modernization Act of 2010, Pub. L. 111–325, to which such amendment relates, with savings provision in cer- tain cases of an election by a regulated investment company under section 852(b)(8) of this title, see sec- tion 205(f) of Pub. L. 113–295, set out as a note under section 852 of this title. EFFECTIVE DATE OF 2010 AMENDMENT Amendment by section 301(g) of Pub. L. 111–325 appli- cable to taxable years beginning after Dec. 22, 2010, see section 301(h) of Pub. L. 111–325, set out as a note under section 852 of this title. Pub. L. 111–325, title III, § 304(d), Dec. 22, 2010, 124 Stat. 3549, provided that: ‘‘The amendments made by this section [amending this section] shall apply to dis- tributions in taxable years beginning after the date of the enactment of this Act [Dec. 22, 2010].’’ EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by section 651(b)(1)(B) of Pub. L. 99–514 applicable to calendar years beginning after Dec. 31, 1986, see section 651(d) of Pub. L. 99–514, set out as an Effective Date note under section 4982 of this title. Amendment by section 655(a)(5) of Pub. L. 99–514 ap- plicable to taxable years beginning after Oct. 22, 1986, see section 655(b) of Pub. L. 99–514, set out as a note under section 852 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88–272 applicable to taxable years of regulated investment companies ending on or after Feb. 26, 1964, see section 229(c) of Pub. L. 88–272, set out as a note under section 852 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86–779 applicable with respect to taxable years of real estate investment trusts begin- ning after Dec. 31, 1960, see section 10(k) of Pub. L. 86–779, set out as an Effective Date note under section 856 of this title. PART II—REAL ESTATE INVESTMENT TRUSTS Sec. 856. Definition of real estate investment trust. 857. Taxation of real estate investment trusts and their beneficiaries. 858. Dividends paid by real estate investment trust after close of taxable year. 859. Adoption of annual accounting period. Editorial Notes AMENDMENTS 1978—Pub. L. 95–600, title III, § 362(d)(7), Nov. 6, 1978, 92 Stat. 2852, substituted in item 859 ‘‘Adoption of annual accounting period’’ for ‘‘Deduction of deficiency divi- dends’’ and struck out item 860 ‘‘Adoption of annual ac- counting period’’. 1976—Pub. L. 94–455, title XVI, §§ 1601(a)(2), 1604(i)(2), Oct. 4, 1976, 90 Stat. 1745, 1752, added items 859 and 860. 1960—Pub. L. 86–779, § 10(a), Sept. 14, 1960, 74 Stat. 1003, added part II analysis. § 856. Definition of real estate investment trust (a) In general For purposes of this title, the term ‘‘real es- tate investment trust’’ means a corporation, trust, or association— (1) which is managed by one or more trustees or directors; (2) the beneficial ownership of which is evi- denced by transferable shares, or by transfer- able certificates of beneficial interest; (3) which (but for the provisions of this part) would be taxable as a domestic corporation; (4) which is neither (A) a financial institu- tion referred to in section 582(c)(2), nor (B) an insurance company to which subchapter L ap- plies; (5) the beneficial ownership of which is held by 100 or more persons; (6) subject to the provisions of subsection (k), which is not closely held (as determined under subsection (h)); and (7) which meets the requirements of sub- section (c). (b) Determination of status The conditions described in paragraphs (1) to (4), inclusive, of subsection (a) must be met dur- ing the entire taxable year, and the condition described in paragraph (5) must exist during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. (c) Limitations A corporation, trust, or association shall not be considered a real estate investment trust for any taxable year unless— (1) it files with its return for the taxable year an election to be a real estate investment trust or has made such election for a previous taxable year, and such election has not been terminated or revoked under subsection (g); (2) at least 95 percent (90 percent for taxable years beginning before January 1, 1980) of its gross income (excluding gross income from prohibited transactions) is derived from— (A) dividends; (B) interest; (C) rents from real property; (D) gain from the sale or other disposition of stock, securities, and real property (in- cluding interests in real property and inter- ests in mortgages on real property) which is not property described in section 1221(a)(1); (E) abatements and refunds of taxes on real property; (F) income and gain derived from fore- closure property (as defined in subsection (e)); (G) amounts (other than amounts the de- termination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for en- tering into agreements (i) to make loans se- cured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property); (H) gain from the sale or other disposition of a real estate asset which is not a prohib- ited transaction solely by reason of section 857(b)(6); and (I) mineral royalty income earned in the first taxable year beginning after the date of the enactment of this subparagraph from real property owned by a timber real estate Page 1976 TITLE 26—INTERNAL REVENUE CODE § 856 investment trust and held, or once held, in connection with the trade or business of pro- ducing timber by such real estate invest- ment trust; (3) at least 75 percent of its gross income (ex- cluding gross income from prohibited trans- actions) is derived from— (A) rents from real property; (B) interest on obligations secured by mortgages on real property or on interests in real property; (C) gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property) which is not property described in section 1221(a)(1); (D) dividends or other distributions on, and gain (other than gain from prohibited transactions) from the sale or other disposi- tion of, transferable shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part; (E) abatements and refunds of taxes on real property; (F) income and gain derived from fore- closure property (as defined in subsection (e)); (G) amounts (other than amounts the de- termination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for en- tering into agreements (i) to make loans se- cured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property); (H) gain from the sale or other disposition of a real estate asset (other than a non- qualified publicly offered REIT debt instru- ment) which is not a prohibited transaction solely by reason of section 857(b)(6); and (I) qualified temporary investment in- come; and (4) at the close of each quarter of the taxable year— (A) at least 75 percent of the value of its total assets is represented by real estate as- sets, cash and cash items (including receiv- ables), and Government securities; and (B)(i) not more than 25 percent of the value of its total assets is represented by se- curities (other than those includible under subparagraph (A)), (ii) not more than 20 percent of the value of its total assets is represented by securi- ties of one or more taxable REIT subsidi- aries, (iii) not more than 25 percent of the value of its total assets is represented by non- qualified publicly offered REIT debt instru- ments, and (iv) except with respect to a taxable REIT subsidiary and securities includible under subparagraph (A)— (I) not more than 5 percent of the value of its total assets is represented by securi- ties of any one issuer, (II) the trust does not hold securities possessing more than 10 percent of the total voting power of the outstanding se- curities of any one issuer, and (III) the trust does not hold securities having a value of more than 10 percent of the total value of the outstanding securi- ties of any one issuer. A real estate investment trust which meets the requirements of this paragraph at the close of any quarter shall not lose its status as a real estate investment trust because of a dis- crepancy during a subsequent quarter between the value of its various investments and such requirements (including a discrepancy caused solely by the change in the foreign currency exchange rate used to value a foreign asset) unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A real estate investment trust which does not meet such requirements at the close of any quarter by reason of a dis- crepancy existing immediately after the ac- quisition of any security or other property which is wholly or partly the result of such ac- quisition during such quarter shall not lose its status for such quarter as a real estate invest- ment trust if such discrepancy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of applying the pre- ceding sentence. (5) For purposes of this part— (A) The term ‘‘value’’ means, with respect to securities for which market quotations are readily available, the market value of such securities; and with respect to other se- curities and assets, fair value as determined in good faith by the trustees, except that in the case of securities of real estate invest- ment trusts such fair value shall not exceed market value or asset value, whichever is higher. (B) The term ‘‘real estate assets’’ means real property (including interests in real property and interests in mortgages on real property or on interests in real property), shares (or transferable certificates of bene- ficial interest) in other real estate invest- ment trusts which meet the requirements of this part, and debt instruments issued by publicly offered REITs. Such term also in- cludes any property (not otherwise a real es- tate asset) attributable to the temporary in- vestment of new capital, but only if such property is stock or a debt instrument, and only for the 1-year period beginning on the date the real estate trust receives such cap- ital. (C) The term ‘‘interests in real property’’ includes fee ownership and co-ownership of land or improvements thereon, leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire leaseholds of land or im- provements thereon, but does not include mineral, oil, or gas royalty interests. (D) QUALIFIED TEMPORARY INVESTMENT IN- COME.— (i) IN GENERAL.—The term ‘‘qualified temporary investment income’’ means any income which— Page 1977 TITLE 26—INTERNAL REVENUE CODE § 856 (I) is attributable to stock or a debt in- strument (within the meaning of section 1275(a)(1)), (II) is attributable to the temporary investment of new capital, and (III) is received or accrued during the 1-year period beginning on the date on which the real estate investment trust receives such capital. (ii) NEW CAPITAL.—The term ‘‘new cap- ital’’ means any amount received by the real estate investment trust— (I) in exchange for stock (or certifi- cates of beneficial interests) in such trust (other than amounts received pur- suant to a dividend reinvestment plan), or (II) in a public offering of debt obliga- tions of such trust which have matu- rities of at least 5 years. (E) A regular or residual interest in a REMIC shall be treated as a real estate asset, and any amount includible in gross in- come with respect to such an interest shall be treated as interest on an obligation se- cured by a mortgage on real property; except that, if less than 95 percent of the assets of such REMIC are real estate assets (deter- mined as if the real estate investment trust held such assets), such real estate invest- ment trust shall be treated as holding di- rectly (and as receiving directly) its propor- tionate share of the assets and income of the REMIC. For purposes of determining wheth- er any interest in a REMIC qualifies under the preceding sentence, any interest held by such REMIC in another REMIC shall be treated as a real estate asset under prin- ciples similar to the principles of the pre- ceding sentence, except that, if such REMIC’s are part of a tiered structure, they shall be treated as one REMIC for purposes of this subparagraph. (F) All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amended (15 U.S.C. 80a–1 and following). (G) TREATMENT OF CERTAIN HEDGING IN- STRUMENTS.—Except to the extent as deter- mined by the Secretary— (i) any income of a real estate invest- ment trust from a hedging transaction (as defined in clause (ii) or (iii) of section 1221(b)(2)(A)), including gain from the sale or disposition of such a transaction, shall not constitute gross income under para- graphs (2) and (3) to the extent that the transaction hedges any indebtedness in- curred or to be incurred by the trust to ac- quire or carry real estate assets, (ii) any income of a real estate invest- ment trust from a transaction entered into by the trust primarily to manage risk of currency fluctuations with respect to any item of income or gain described in para- graph (2) or (3) (or any property which gen- erates such income or gain), including gain from the termination of such a trans- action, shall not constitute gross income under paragraphs (2) and (3), (iii) if— (I) a real estate investment trust en- ters into one or more positions described in clause (i) with respect to indebtedness described in clause (i) or one or more po- sitions described in clause (ii) with re- spect to property which generates in- come or gain described in paragraph (2) or (3), (II) any portion of such indebtedness is extinguished or any portion of such prop- erty is disposed of, and (III) in connection with such extin- guishment or disposition, such trust en- ters into one or more transactions which would be hedging transactions described in clause (ii) or (iii) of section 1221(b)(2)(A) with respect to any position referred to in subclause (I) if such posi- tion were ordinary property, any income of such trust from any posi- tion referred to in subclause (I) and from any transaction referred to in subclause (III) (including gain from the termination of any such position or transaction) shall not constitute gross income under para- graphs (2) and (3) to the extent that such transaction hedges such position, and (iv) clauses (i), (ii), and (iii) shall not apply with respect to any transaction un- less such transaction satisfies the identi- fication requirement described in section 1221(a)(7) (determined after taking into ac- count any curative provisions provided under the regulations referred to therein). (H) TREATMENT OF TIMBER GAINS.— (i) IN GENERAL.—Gain from the sale of real property described in paragraph (2)(D) and (3)(C) shall include gain which is— (I) recognized by an election under sec- tion 631(a) from timber owned by the real estate investment trust, the cutting of which is provided by a taxable REIT sub- sidiary of the real estate investment trust; (II) recognized under section 631(b); or (III) income which would constitute gain under subclause (I) or (II) but for the failure to meet the 1-year holding pe- riod requirement. (ii) SPECIAL RULES.— (I) For purposes of this subtitle, cut timber, the gain from which is recog- nized by a real estate investment trust pursuant to an election under section 631(a) described in clause (i)(I) or so much of clause (i)(III) as relates to clause (i)(I), shall be deemed to be sold to the taxable REIT subsidiary of the real estate investment trust on the first day of the taxable year. (II) For purposes of this subtitle, in- come described in this subparagraph shall not be treated as gain from the sale of property described in section 1221(a)(1). (iii) TERMINATION.—This subparagraph shall not apply to dispositions after the termination date. Page 1978 TITLE 26—INTERNAL REVENUE CODE § 856 (I) TIMBER REAL ESTATE INVESTMENT TRUST.—The term ‘‘timber real estate in- vestment trust’’ means a real estate invest- ment trust in which more than 50 percent in value of its total assets consists of real prop- erty held in connection with the trade or business of producing timber. (J) SECRETARIAL AUTHORITY TO EXCLUDE OTHER ITEMS OF INCOME.—To the extent nec- essary to carry out the purposes of this part, the Secretary is authorized to determine, solely for purposes of this part, whether any item of income or gain which— (i) does not otherwise qualify under para- graph (2) or (3) may be considered as not constituting gross income for purposes of paragraphs (2) or (3), or (ii) otherwise constitutes gross income not qualifying under paragraph (2) or (3) may be considered as gross income which qualifies under paragraph (2) or (3). (K) CASH.—If the real estate investment trust or its qualified business unit (as de- fined in section 989) uses any foreign cur- rency as its functional currency (as defined in section 985(b)), the term ‘‘cash’’ includes such foreign currency but only to the extent such foreign currency— (i) is held for use in the normal course of the activities of the trust or qualified busi- ness unit which give rise to items of in- come or gain described in paragraph (2) or (3) of subsection (c) or are directly related to acquiring or holding assets described in subsection (c)(4), and (ii) is not held in connection with an ac- tivity described in subsection (n)(4). (L) DEFINITIONS RELATED TO DEBT INSTRU- MENTS OF PUBLICLY OFFERED REITS.— (i) PUBLICLY OFFERED REIT.—The term ‘‘publicly offered REIT’’ has the meaning given such term by section 562(c)(2). (ii) NONQUALIFIED PUBLICLY OFFERED REIT DEBT INSTRUMENT.—The term ‘‘non- qualified publicly offered REIT debt in- strument’’ means any real estate asset which would cease to be a real estate asset if subparagraph (B) were applied without regard to the reference to ‘‘debt instru- ments issued by publicly offered REITs’’. (6) A corporation, trust, or association which fails to meet the requirements of paragraph (2) or (3), or of both such paragraphs, for any tax- able year shall nevertheless be considered to have satisfied the requirements of such para- graphs for such taxable year if— (A) following the corporation, trust, or as- sociation’s identification of the failure to meet the requirements of paragraph (2) or (3), or of both such paragraphs, for any tax- able year, a description of each item of its gross income described in such paragraphs is set forth in a schedule for such taxable year filed in accordance with regulations pre- scribed by the Secretary, and (B) the failure to meet the requirements of paragraph (2) or (3), or of both such para- graphs, is due to reasonable cause and not due to willful neglect. (7) RULES OF APPLICATION FOR FAILURE TO SATISFY PARAGRAPH (4).— (A) IN GENERAL.—A corporation, trust, or association that fails to meet the require- ments of paragraph (4) (other than a failure to meet the requirements of paragraph (4)(B)(iv) which is described in subparagraph (B)(i) of this paragraph) for a particular quarter shall nevertheless be considered to have satisfied the requirements of such para- graph for such quarter if— (i) following the corporation, trust, or association’s identification of the failure to satisfy the requirements of such para- graph for a particular quarter, a descrip- tion of each asset that causes the corpora- tion, trust, or association to fail to satisfy the requirements of such paragraph at the close of such quarter of any taxable year is set forth in a schedule for such quarter filed in accordance with regulations pre- scribed by the Secretary, (ii) the failure to meet the requirements of such paragraph for a particular quarter is due to reasonable cause and not due to willful neglect, and (iii)(I) the corporation, trust, or associa- tion disposes of the assets set forth on the schedule specified in clause (i) within 6 months after the last day of the quarter in which the corporation, trust or associa- tion’s identification of the failure to sat- isfy the requirements of such paragraph occurred or such other time period pre- scribed by the Secretary and in the man- ner prescribed by the Secretary, or (II) the requirements of such paragraph are otherwise met within the time period specified in subclause (I). (B) RULE FOR CERTAIN DE MINIMIS FAIL- URES.—A corporation, trust, or association that fails to meet the requirements of para- graph (4)(B)(iv) for a particular quarter shall nevertheless be considered to have satisfied the requirements of such paragraph for such quarter if— (i) such failure is due to the ownership of assets the total value of which does not ex- ceed the lesser of— (I) 1 percent of the total value of the trust’s assets at the end of the quarter for which such measurement is done, and (II) $10,000,000, and (ii)(I) the corporation, trust, or associa- tion, following the identification of such failure, disposes of assets in order to meet the requirements of such paragraph within 6 months after the last day of the quarter in which the corporation, trust or associa- tion’s identification of the failure to sat- isfy the requirements of such paragraph occurred or such other time period pre- scribed by the Secretary and in the man- ner prescribed by the Secretary, or (II) the requirements of such paragraph are otherwise met within the time period specified in subclause (I). (C) TAX.— (i) TAX IMPOSED.—If subparagraph (A) ap- plies to a corporation, trust, or association for any taxable year, there is hereby im- posed on such corporation, trust, or asso- Page 1979 TITLE 26—INTERNAL REVENUE CODE § 856 ciation a tax in an amount equal to the greater of— (I) $50,000, or (II) the amount determined (pursuant to regulations promulgated by the Sec- retary) by multiplying the net income generated by the assets described in the schedule specified in subparagraph (A)(i) for the period specified in clause (ii) by the highest rate of tax specified in sec- tion 11. (ii) PERIOD.—For purposes of clause (i)(II), the period described in this clause is the period beginning on the first date that the failure to satisfy the requirements of such paragraph (4) occurs as a result of the ownership of such assets and ending on the earlier of the date on which the trust dis- poses of such assets or the end of the first quarter when there is no longer a failure to satisfy such paragraph (4). (iii) ADMINISTRATIVE PROVISIONS.—For purposes of subtitle F, the taxes imposed by this subparagraph shall be treated as excise taxes with respect to which the defi- ciency procedures of such subtitle apply. (8) ELECTION AFTER TAX-FREE REORGANIZA- TION.—If a corporation was a distributing cor- poration or a controlled corporation (other than a controlled corporation with respect to a distribution described in section 355(h)(2)(A)) with respect to any distribution to which sec- tion 355 (or so much of section 356 as relates to section 355) applied, such corporation (and any successor corporation) shall not be eligible to make any election under paragraph (1) for any taxable year beginning before the end of the 10-year period beginning on the date of such distribution. (9) SPECIAL RULES FOR CERTAIN PERSONAL PROPERTY WHICH IS ANCILLARY TO REAL PROP- ERTY.— (A) CERTAIN PERSONAL PROPERTY LEASED IN CONNECTION WITH REAL PROPERTY.— (i) IN GENERAL.—Personal property shall be treated as a real estate asset for pur- poses of paragraph (4)(A) to the extent that rents attributable to such personal property are treated as rents from real property under subsection (d)(1)(C). (ii) TREATMENT OF GAIN ON DISPOSITION.— If— (I) personal property is leased under, or in connection with, a lease of real prop- erty, for a period of not less than 1 year, and rents attributable to such personal property are treated as rents from real property under subsection (d)(1)(C), (II) any portion of such personal prop- erty and any portion of such real prop- erty are sold, or otherwise disposed of, in a single disposition (or contempora- neously in separate dispositions), and (III) the fair market value of the per- sonal property so sold or contempora- neously disposed of (determined at the time of disposition) does not exceed 15 percent of the total fair market value of all of the personal and real property so sold or contemporaneously disposed of (determined at the time of disposition), any gain from such dispositions shall be treated for purposes of paragraphs (2)(H) and (3)(H) as gain from the disposition of a real estate asset. (B) CERTAIN PERSONAL PROPERTY MORT- GAGED IN CONNECTION WITH REAL PROPERTY.— (i) IN GENERAL.—In the case of an obliga- tion secured by a mortgage on both real property and personal property, if the fair market value of such personal property does not exceed 15 percent of the total fair market value of all such property, such ob- ligation shall be treated— (I) for purposes of paragraph (3)(B), as an obligation described therein, (II) for purposes of paragraph (4)(A), as a real estate asset, and (III) for purposes of paragraphs (2)(D) and (3)(C), as a mortgage on real prop- erty. (ii) DETERMINATION OF FAIR MARKET VALUE.— (I) IN GENERAL.—Except as provided in subclause (II), the fair market value of all such property shall be determined for purposes of clause (i) in the same man- ner as the fair market value of real prop- erty is determined for purposes of appor- tioning interest income between real property and personal property under paragraph (3)(B). (II) GAIN ON DISPOSITION.—For purposes of applying clause (i)(III), fair market value shall be determined at the time of sale or other disposition. (10) TERMINATION DATE.—For purposes of this subsection, the term ‘‘termination date’’ means, with respect to any taxpayer, the last day of the taxpayer’s first taxable year begin- ning after the date of the enactment of this paragraph and before the date that is 1 year after such date of enactment. (d) Rents from real property defined (1) Amounts included For purposes of paragraphs (2) and (3) of sub- section (c), the term ‘‘rents from real prop- erty’’ includes (subject to paragraph (2))— (A) rents from interests in real property, (B) charges for services customarily fur- nished or rendered in connection with the rental of real property, whether or not such charges are separately stated, and (C) rent attributable to personal property which is leased under, or in connection with, a lease of real property, but only if the rent attributable to such personal property for the taxable year does not exceed 15 percent of the total rent for the taxable year attrib- utable to both the real and personal prop- erty leased under, or in connection with, such lease. For purposes of subparagraph (C), with respect to each lease of real property, rent attrib- utable to personal property for the taxable year is that amount which bears the same ratio to total rent for the taxable year as the average of the fair market values of the per- sonal property at the beginning and at the end Page 1980 TITLE 26—INTERNAL REVENUE CODE § 856 of the taxable year bears to the average of the aggregate fair market values of both the real property and the personal property at the be- ginning and at the end of such taxable year. (2) Amounts excluded For purposes of paragraphs (2) and (3) of sub- section (c), the term ‘‘rents from real prop- erty’’ does not include— (A) except as provided in paragraphs (4) and (6), any amount received or accrued, di- rectly or indirectly, with respect to any real or personal property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that any amount so received or accrued shall not be excluded from the term ‘‘rents from real property’’ solely by reason of being based on a fixed percentage or percentages of receipts or sales); (B) except as provided in paragraph (8), any amount received or accrued directly or indirectly from any person if the real estate investment trust owns, directly or indi- rectly— (i) in the case of any person which is a corporation, stock of such person pos- sessing 10 percent or more of the total combined voting power of all classes of stock entitled to vote, or 10 percent or more of the total value of shares of all classes of stock of such person; or (ii) in the case of any person which is not a corporation, an interest of 10 percent or more in the assets or net profits of such person; and (C) any impermissible tenant service in- come (as defined in paragraph (7)). (3) Independent contractor defined For purposes of this subsection and sub- section (e), the term ‘‘independent contractor’’ means any person— (A) who does not own, directly or indi- rectly, more than 35 percent of the shares, or certificates of beneficial interest, in the real estate investment trust; and (B) if such person is a corporation, not more than 35 percent of the total combined voting power of whose stock (or 35 percent of the total shares of all classes of whose stock), or, if such person is not a corpora- tion, not more than 35 percent of the inter- est in whose assets or net profits is owned, directly or indirectly, by one or more per- sons owning 35 percent or more of the shares or certificates of beneficial interest in the trust. In the event that any class of stock of either the real estate investment trust or such per- son is regularly traded on an established secu- rities market, only persons who own, directly or indirectly, more than 5 percent of such class of stock shall be taken into account as owning any of the stock of such class for pur- poses of applying the 35 percent limitation set forth in subparagraph (B) (but all of the out- standing stock of such class shall be consid- ered outstanding in order to compute the de- nominator for purpose of determining the ap- plicable percentage of ownership). (4) Special rule for certain contingent rents Where a real estate investment trust re- ceives or accrues, with respect to real or per- sonal property, any amount which would be excluded from the term ‘‘rents from real prop- erty’’ solely because the tenant of the real es- tate investment trust receives or accrues, di- rectly or indirectly, from subtenants any amount the determination of which depends in whole or in part on the income or profits de- rived by any person from such property, only a proportionate part (determined pursuant to regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust from that tenant will be ex- cluded from the term ‘‘rents from real prop- erty’’. (5) Constructive ownership of stock For purposes of this subsection, the rules prescribed by section 318(a) for determining the ownership of stock shall apply in deter- mining the ownership of stock, assets, or net profits of any person; except that— (A) ‘‘10 percent’’ shall be substituted for ‘‘50 percent’’ in subparagraph (C) of para- graphs (2) and (3) of section 318(a), and (B) section 318(a)(3)(A) shall be applied in the case of a partnership by taking into ac- count only partners who own (directly or in- directly) 25 percent or more of the capital interest, or the profits interest, in the part- nership. (6) Special rule for certain property subleased by tenant of real estate investment trusts (A) In general If— (i) a real estate investment trust re- ceives or accrues, with respect to real or personal property, amounts from a tenant which derives substantially all of its in- come with respect to such property from the subleasing of substantially all of such property, and (ii) a portion of the amount such tenant receives or accrues, directly or indirectly, from subtenants consists of qualified rents, then the amounts which the trust receives or accrues from the tenant shall not be ex- cluded from the term ‘‘rents from real prop- erty’’ by reason of being based on the income or profits of such tenant to the extent the amounts so received or accrued are attrib- utable to qualified rents received or accrued by such tenant. (B) Qualified rents For purposes of subparagraph (A), the term ‘‘qualified rents’’ means any amount which would be treated as rents from real property if received by the real estate investment trust. (7) Impermissible tenant service income For purposes of paragraph (2)(C)— (A) In general The term ‘‘impermissible tenant service income’’ means, with respect to any real or personal property, any amount received or Page 1981 TITLE 26—INTERNAL REVENUE CODE § 856 accrued directly or indirectly by the real es- tate investment trust for— (i) services furnished or rendered by the trust to the tenants of such property, or (ii) managing or operating such prop- erty. (B) Disqualification of all amounts where more than de minimis amount If the amount described in subparagraph (A) with respect to a property for any tax- able year exceeds 1 percent of all amounts received or accrued during such taxable year directly or indirectly by the real estate in- vestment trust with respect to such prop- erty, the impermissible tenant service in- come of the trust with respect to the prop- erty shall include all such amounts. (C) Exceptions For purposes of subparagraph (A)— (i) services furnished or rendered, or management or operation provided, through an independent contractor from whom the trust itself does not derive or re- ceive any income or through a taxable REIT subsidiary of such trust shall not be treated as furnished, rendered, or provided by the trust, and (ii) there shall not be taken into account any amount which would be excluded from unrelated business taxable income under section 512(b)(3) if received by an organiza- tion described in section 511(a)(2). (D) Amount attributable to impermissible services For purposes of subparagraph (A), the amount treated as received for any service (or management or operation) shall not be less than 150 percent of the direct cost of the trust in furnishing or rendering the service (or providing the management or operation). (E) Coordination with limitations For purposes of paragraphs (2) and (3) of subsection (c), amounts described in sub- paragraph (A) shall be included in the gross income of the corporation, trust, or associa- tion. (8) Special rule for taxable REIT subsidiaries For purposes of this subsection, amounts paid to a real estate investment trust by a taxable REIT subsidiary of such trust shall not be excluded from rents from real property by reason of paragraph (2)(B) if the require- ments of either of the following subparagraphs are met: (A) Limited rental exception (i) In general The requirements of this subparagraph are met with respect to any property if at least 90 percent of the leased space of the property is rented to persons other than taxable REIT subsidiaries of such trust and other than persons described in para- graph (2)(B). (ii) Rents must be substantially comparable Clause (i) shall apply only to the extent that the amounts paid to the trust as rents from real property (as defined in para- graph (1) without regard to paragraph (2)(B)) from such property are substan- tially comparable to such rents paid by the other tenants of the trust’s property for comparable space. (iii) Times for testing rent comparability The substantial comparability require- ment of clause (ii) shall be treated as met with respect to a lease to a taxable REIT subsidiary of the trust if such requirement is met under the terms of the lease— (I) at the time such lease is entered into, (II) at the time of each extension of the lease, including a failure to exercise a right to terminate, and (III) at the time of any modification of the lease between the trust and the tax- able REIT subsidiary if the rent under such lease is effectively increased pursu- ant to such modification. With respect to subclause (III), if the tax- able REIT subsidiary of the trust is a con- trolled taxable REIT subsidiary of the trust, the term ‘‘rents from real property’’ shall not in any event include rent under such lease to the extent of the increase in such rent on account of such modification. (iv) Controlled taxable REIT subsidiary For purposes of clause (iii), the term ‘‘controlled taxable REIT subsidiary’’ means, with respect to any real estate in- vestment trust, any taxable REIT sub- sidiary of such trust if such trust owns di- rectly or indirectly— (I) stock possessing more than 50 per- cent of the total voting power of the out- standing stock of such subsidiary, or (II) stock having a value of more than 50 percent of the total value of the out- standing stock of such subsidiary. (v) Continuing qualification based on third party actions If the requirements of clause (i) are met at a time referred to in clause (iii), such requirements shall continue to be treated as met so long as there is no increase in the space leased to any taxable REIT sub- sidiary of such trust or to any person de- scribed in paragraph (2)(B). (vi) Correction period If there is an increase referred to in clause (v) during any calendar quarter with respect to any property, the require- ments of clause (iii) shall be treated as met during the quarter and the succeeding quarter if such requirements are met at the close of such succeeding quarter. (B) Exception for certain lodging facilities and health care property The requirements of this subparagraph are met with respect to an interest in real prop- erty which is a qualified lodging facility (as defined in paragraph (9)(D)) or a qualified health care property (as defined in sub- section (e)(6)(D)(i)) leased by the trust to a Page 1982 TITLE 26—INTERNAL REVENUE CODE § 856 taxable REIT subsidiary of the trust if the property is operated on behalf of such sub- sidiary by a person who is an eligible inde- pendent contractor. For purposes of this sec- tion, a taxable REIT subsidiary is not con- sidered to be operating or managing a quali- fied health care property or qualified lodging facility solely because it— (i) directly or indirectly possesses a li- cense, permit, or similar instrument ena- bling it to do so, or (ii) employs individuals working at such facility or property located outside the United States, but only if an eligible inde- pendent contractor is responsible for the daily supervision and direction of such in- dividuals on behalf of the taxable REIT subsidiary pursuant to a management agreement or similar service contract. (9) Eligible independent contractor For purposes of paragraph (8)(B)— (A) In general The term ‘‘eligible independent con- tractor’’ means, with respect to any quali- fied lodging facility or qualified health care property (as defined in subsection (e)(6)(D)(i)), any independent contractor if, at the time such contractor enters into a management agreement or other similar service contract with the taxable REIT sub- sidiary to operate such qualified lodging fa- cility or qualified health care property, such contractor (or any related person) is ac- tively engaged in the trade or business of op- erating qualified lodging facilities or quali- fied health care properties, respectively, for any person who is not a related person with respect to the real estate investment trust or the taxable REIT subsidiary. (B) Special rules Solely for purposes of this paragraph and paragraph (8)(B), a person shall not fail to be treated as an independent contractor with respect to any qualified lodging facility or qualified health care property (as so defined) by reason of the following: (i) The taxable REIT subsidiary bears the expenses for the operation of such qualified lodging facility or qualified health care property pursuant to the man- agement agreement or other similar serv- ice contract. (ii) The taxable REIT subsidiary receives the revenues from the operation of such qualified lodging facility or qualified health care property, net of expenses for such operation and fees payable to the op- erator pursuant to such agreement or con- tract. (iii) The real estate investment trust re- ceives income from such person with re- spect to another property that is attrib- utable to a lease of such other property to such person that was in effect as of the later of— (I) January 1, 1999, or (II) the earliest date that any taxable REIT subsidiary of such trust entered into a management agreement or other similar service contract with such per- son with respect to such qualified lodg- ing facility or qualified health care prop- erty. (C) Renewals, etc., of existing leases For purposes of subparagraph (B)(iii)— (i) a lease shall be treated as in effect on January 1, 1999, without regard to its re- newal after such date, so long as such re- newal is pursuant to the terms of such lease as in effect on whichever of the dates under subparagraph (B)(iii) is the latest, and (ii) a lease of a property entered into after whichever of the dates under sub- paragraph (B)(iii) is the latest shall be treated as in effect on such date if— (I) on such date, a lease of such prop- erty from the trust was in effect, and (II) under the terms of the new lease, such trust receives a substantially simi- lar or lesser benefit in comparison to the lease referred to in subclause (I). (D) Qualified lodging facility For purposes of this paragraph— (i) In general The term ‘‘qualified lodging facility’’ means any lodging facility unless wager- ing activities are conducted at or in con- nection with such facility by any person who is engaged in the business of accept- ing wagers and who is legally authorized to engage in such business at or in connec- tion with such facility. (ii) Lodging facility The term ‘‘lodging facility’’ means a— (I) hotel, (II) motel, or (III) other establishment more than one-half of the dwelling units in which are used on a transient basis. (iii) Customary amenities and facilities The term ‘‘lodging facility’’ includes customary amenities and facilities oper- ated as part of, or associated with, the lodging facility so long as such amenities and facilities are customary for other properties of a comparable size and class owned by other owners unrelated to such real estate investment trust. (E) Operate includes manage References in this paragraph to operating a property shall be treated as including a reference to managing the property. (F) Related person Persons shall be treated as related to each other if such persons are treated as a single employer under subsection (a) or (b) of sec- tion 52. (e) Special rules for foreclosure property (1) Foreclosure property defined For purposes of this part, the term ‘‘fore- closure property’’ means any real property (in- cluding interests in real property), and any personal property incident to such real prop- Page 1983 TITLE 26—INTERNAL REVENUE CODE § 856 erty, acquired by the real estate investment trust as the result of such trust having bid in such property at foreclosure, or having other- wise reduced such property to ownership or possession by agreement or process of law, after there was default (or default was immi- nent) on a lease of such property or on an in- debtedness which such property secured. Such term does not include property acquired by the real estate investment trust as a result of indebtedness arising from the sale or other disposition of property of the trust described in section 1221(a)(1) which was not originally acquired as foreclosure property. (2) Grace period Except as provided in paragraph (3), prop- erty shall cease to be foreclosure property with respect to the real estate investment trust as of the close of the 3d taxable year fol- lowing the taxable year in which the trust ac- quired such property. (3) Extensions If the real estate investment trust estab- lishes to the satisfaction of the Secretary that an extension of the grace period is necessary for the orderly liquidation of the trust’s inter- ests in such property, the Secretary may grant one extension of the grace period for such property. Any such extension shall not extend the grace period beyond the close of the 3d taxable year following the last taxable year in the period under paragraph (2). (4) Termination of grace period in certain cases Any foreclosure property shall cease to be such on the first day (occurring on or after the day on which the real estate investment trust acquired the property) on which— (A) a lease is entered into with respect to such property which, by its terms, will give rise to income which is not described in sub- section (c)(3) (other than subparagraph (F) of such subsection), or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day which is not described in such subsection, (B) any construction takes place on such property (other than completion of a build- ing, or completion of any other improve- ment, where more than 10 percent of the construction of such building or other im- provement was completed before default be- came imminent), or (C) if such day is more than 90 days after the day on which such property was acquired by the real estate investment trust and the property is used in a trade or business which is conducted by the trust (other than through an independent contractor (within the meaning of section (d)(3)) from whom the trust itself does not derive or receive any in- come or through a taxable REIT subsidiary). For purposes of subparagraph (C), property shall not be treated as used in a trade or busi- ness by reason of any activities of the real es- tate investment trust with respect to such property to the extent that such activities would not result in amounts received or ac- crued, directly or indirectly, with respect to such property being treated as other than rents from real property. (5) Taxpayer must make election Property shall be treated as foreclosure property for purposes of this part only if the real estate investment trust so elects (in the manner provided in regulations prescribed by the Secretary) on or before the due date (in- cluding any extensions of time) for filing its return of tax under this chapter for the tax- able year in which such trust acquires such property. A real estate investment trust may revoke any such election for a taxable year by filing the revocation (in the manner provided by the Secretary) on or before the due date (including any extension of time) for filing its return of tax under this chapter for the tax- able year. If a trust revokes an election for any property, no election may be made by the trust under this paragraph with respect to the property for any subsequent taxable year. (6) Special rule for qualified health care prop- erties For purposes of this subsection— (A) Acquisition at expiration of lease The term ‘‘foreclosure property’’ shall in- clude any qualified health care property ac- quired by a real estate investment trust as the result of the termination of a lease of such property (other than a termination by reason of a default, or the imminence of a default, on the lease). (B) Grace period In the case of a qualified health care prop- erty which is foreclosure property solely by reason of subparagraph (A), in lieu of apply- ing paragraphs (2) and (3)— (i) the qualified health care property shall cease to be foreclosure property as of the close of the second taxable year after the taxable year in which such trust ac- quired such property, and (ii) if the real estate investment trust es- tablishes to the satisfaction of the Sec- retary that an extension of the grace pe- riod in clause (i) is necessary to the or- derly leasing or liquidation of the trust’s interest in such qualified health care prop- erty, the Secretary may grant one or more extensions of the grace period for such qualified health care property. Any such extension shall not extend the grace period beyond the close of the 6th year after the taxable year in which such trust acquired such qualified health care property. (C) Income from independent contractors For purposes of applying paragraph (4)(C) with respect to qualified health care prop- erty which is foreclosure property by reason of subparagraph (A) or paragraph (1), income derived or received by the trust from an independent contractor shall be disregarded to the extent such income is attributable to— (i) any lease of property in effect on the date the real estate investment trust ac- quired the qualified health care property Page 1984 TITLE 26—INTERNAL REVENUE CODE § 856 (without regard to its renewal after such date so long as such renewal is pursuant to the terms of such lease as in effect on such date), or (ii) any lease of property entered into after such date if— (I) on such date, a lease of such prop- erty from the trust was in effect, and (II) under the terms of the new lease, such trust receives a substantially simi- lar or lesser benefit in comparison to the lease referred to in subclause (I). (D) Qualified health care property (i) In general The term ‘‘qualified health care prop- erty’’ means any real property (including interests therein), and any personal prop- erty incident to such real property, which— (I) is a health care facility, or (II) is necessary or incidental to the use of a health care facility. (ii) Health care facility For purposes of clause (i), the term ‘‘health care facility’’ means a hospital, nursing facility, assisted living facility, congregate care facility, qualified con- tinuing care facility (as defined in section 7872(g)(4)), or other licensed facility which extends medical or nursing or ancillary services to patients and which, imme- diately before the termination, expiration, default, or breach of the lease of or mort- gage secured by such facility, was operated by a provider of such services which was eligible for participation in the medicare program under title XVIII of the Social Security Act with respect to such facility. (f) Interest (1) In general For purposes of paragraphs (2)(B) and (3)(B) of subsection (c), the term ‘‘interest’’ does not include any amount received or accrued, di- rectly or indirectly, if the determination of such amount depends in whole or in part on the income or profits of any person except that— (A) any amount so received or accrued shall not be excluded from the term ‘‘inter- est’’ solely by reason of being based on a fixed percentage or percentages of receipts or sales, and (B) where a real estate investment trust receives any amount which would be ex- cluded from the term ‘‘interest’’ solely be- cause the debtor of the real estate invest- ment trust receives or accrues any amount the determination of which depends in whole or in part on the income or profits of any person, only a proportionate part (deter- mined pursuant to regulations prescribed by the Secretary) of the amount received or ac- crued by the real estate investment trust from the debtor will be excluded from the term ‘‘interest’’. (2) Special rule If— (A) a real estate investment trust receives or accrues with respect to an obligation se- cured by a mortgage on real property or an interest in real property amounts from a debtor which derives substantially all of its gross income with respect to such property (not taking into account any gain on any disposition) from the leasing of substan- tially all of its interests in such property to tenants, and (B) a portion of the amount which such debtor receives or accrues, directly or indi- rectly, from tenants consists of qualified rents (as defined in subsection (d)(6)(B)), then the amounts which the trust receives or accrues from such debtor shall not be excluded from the term ‘‘interest’’ by reason of being based on the income or profits of such debtor to the extent the amounts so received are at- tributable to qualified rents received or ac- crued by such debtor. (g) Termination of election (1) Failure to qualify An election under subsection (c)(1) made by a corporation, trust, or association shall ter- minate if the corporation, trust, or associa- tion is not a real estate investment trust to which the provisions of this part apply for the taxable year with respect to which the elec- tion is made, or for any succeeding taxable year unless paragraph (5) applies. Such termi- nation shall be effective for the taxable year for which the corporation, trust, or associa- tion is not a real estate investment trust to which the provisions of this part apply, and for all succeeding taxable years. (2) Revocation An election under subsection (c)(1) made by a corporation, trust, or association may be re- voked by it for any taxable year after the first taxable year for which the election is effec- tive. A revocation under this paragraph shall be effective for the taxable year in which made and for all succeeding taxable years. Such rev- ocation must be made on or before the 90th day after the first day of the first taxable year for which the revocation is to be effective. Such revocation shall be made in such manner as the Secretary shall prescribe by regula- tions. (3) Election after termination or revocation Except as provided in paragraph (4), if a cor- poration, trust, or association has made an election under subsection (c)(1) and such elec- tion has been terminated or revoked under paragraph (1) or paragraph (2), such corpora- tion, trust, or association (and any successor corporation, trust, or association) shall not be eligible to make an election under subsection (c)(1) for any taxable year prior to the fifth taxable year which begins after the first tax- able year for which such termination or rev- ocation is effective. (4) Exception If the election of a corporation, trust, or as- sociation has been terminated under para- graph (1), paragraph (3) shall not apply if— (A) the corporation, trust, or association does not willfully fail to file within the time prescribed by law an income tax return for Page 1985 TITLE 26—INTERNAL REVENUE CODE § 856 the taxable year with respect to which the termination of the election under subsection (c)(1) occurs; (B) the inclusion of any incorrect informa- tion in the return referred to in subpara- graph (A) is not due to fraud with intent to evade tax; and (C) the corporation, trust, or association establishes to the satisfaction of the Sec- retary that its failure to qualify as a real es- tate investment trust to which the provi- sions of this part apply is due to reasonable cause and not due to willful neglect. (5) Entities to which paragraph applies This paragraph applies to a corporation, trust, or association— (A) which is not a real estate investment trust to which the provisions of this part apply for the taxable year due to one or more failures to comply with one or more of the provisions of this part (other than para- graph (2), (3), or (4) of subsection (c)), (B) such failures are due to reasonable cause and not due to willful neglect, and (C) if such corporation, trust, or associa- tion pays (as prescribed by the Secretary in regulations and in the same manner as tax) a penalty of $50,000 for each failure to satisfy a provision of this part due to reasonable cause and not willful neglect. (h) Closely held determinations (1) Section 542(a)(2) applied (A) In general For purposes of subsection (a)(6), a cor- poration, trust, or association is closely held if the stock ownership requirement of sec- tion 542(a)(2) is met. (B) Waiver of partnership attribution, etc. For purposes of subparagraph (A)— (i) paragraph (2) of section 544(a) shall be applied as if such paragraph did not con- tain the phrase ‘‘or by or for his partner’’, and (ii) sections 544(a)(4)(A) and 544(b)(1) shall be applied by substituting ‘‘the enti- ty meet the stock ownership requirement of section 542(a)(2)’’ for ‘‘the corporation a personal holding company’’. (2) Subsections (a)(5) and (6) not to apply to 1st year Paragraphs (5) and (6) of subsection (a) shall not apply to the 1st taxable year for which an election is made under subsection (c)(1) by any corporation, trust, or association. (3) Treatment of trusts described in section 401(a) (A) Look-thru treatment (i) In general Except as provided in clause (ii), in de- termining whether the stock ownership re- quirement of section 542(a)(2) is met for purposes of paragraph (1)(A), any stock held by a qualified trust shall be treated as held directly by its beneficiaries in propor- tion to their actuarial interests in such trust and shall not be treated as held by such trust. (ii) Certain related trusts not eligible Clause (i) shall not apply to any quali- fied trust if one or more disqualified per- sons (as defined in section 4975(e)(2), with- out regard to subparagraphs (B) and (I) thereof) with respect to such qualified trust hold in the aggregate 5 percent or more in value of the interests in the real estate investment trust and such real es- tate investment trust has accumulated earnings and profits attributable to any period for which it did not qualify as a real estate investment trust. (B) Coordination with personal holding com- pany rules If any entity qualifies as a real estate in- vestment trust for any taxable year by rea- son of subparagraph (A), such entity shall not be treated as a personal holding com- pany for such taxable year for purposes of part II of subchapter G of this chapter. (C) Treatment for purposes of unrelated business tax If any qualified trust holds more than 10 percent (by value) of the interests in any pension-held REIT at any time during a tax- able year, the trust shall be treated as hav- ing for such taxable year gross income from an unrelated trade or business in an amount which bears the same ratio to the aggregate dividends paid (or treated as paid) by the REIT to the trust for the taxable year of the REIT with or within which the taxable year of the trust ends (the ‘‘REIT year’’) as— (i) the gross income (less direct expenses related thereto) of the REIT for the REIT year from unrelated trades or businesses (determined as if the REIT were a quali- fied trust), bears to (ii) the gross income (less direct ex- penses related thereto) of the REIT for the REIT year. This subparagraph shall apply only if the ratio determined under the preceding sen- tence is at least 5 percent. (D) Pension-held REIT The purposes of subparagraph (C)— (i) In general A real estate investment trust is a pen- sion-held REIT if such trust would not have qualified as a real estate investment trust but for the provisions of this para- graph and if such trust is predominantly held by qualified trusts. (ii) Predominantly held For purposes of clause (i), a real estate investment trust is predominantly held by qualified trusts if— (I) at least 1 qualified trust holds more than 25 percent (by value) of the inter- ests in such real estate investment trust, or (II) 1 or more qualified trusts (each of whom own more than 10 percent by value of the interests in such real estate in- vestment trust) hold in the aggregate more than 50 percent (by value) of the in- Page 1986 TITLE 26—INTERNAL REVENUE CODE § 856 terests in such real estate investment trust. (E) Qualified trust For purposes of this paragraph, the term ‘‘qualified trust’’ means any trust described in section 401(a) and exempt from tax under section 501(a). (i) Treatment of certain wholly owned subsidi- aries (1) In general For purposes of this title— (A) a corporation which is a qualified REIT subsidiary shall not be treated as a separate corporation, and (B) all assets, liabilities, and items of in- come, deduction, and credit of a qualified REIT subsidiary shall be treated as assets, liabilities, and such items (as the case may be) of the real estate investment trust. (2) Qualified REIT subsidiary For purposes of this subsection, the term ‘‘qualified REIT subsidiary’’ means any cor- poration if 100 percent of the stock of such cor- poration is held by the real estate investment trust. Such term shall not include a taxable REIT subsidiary. (3) Treatment of termination of qualified sub- sidiary status For purposes of this subtitle, if any corpora- tion which was a qualified REIT subsidiary ceases to meet the requirements of paragraph (2), such corporation shall be treated as a new corporation acquiring all of its assets (and as- suming all of its liabilities) immediately be- fore such cessation from the real estate in- vestment trust in exchange for its stock. (j) Treatment of shared appreciation mortgages (1) In general Solely for purposes of subsection (c) of this section and section 857(b)(6), any income de- rived from a shared appreciation provision shall be treated as gain recognized on the sale of the secured property. (2) Treatment of income For purposes of applying subsection (c) of this section and section 857(b)(6) to any in- come described in paragraph (1)— (A) the real estate investment trust shall be treated as holding the secured property for the period during which it held the shared appreciation provision (or, if shorter, for the period during which the secured property was held by the person holding such property), and (B) the secured property shall be treated as property described in section 1221(a)(1) if it is so described in the hands of the person holding the secured property (or it would be so described if held by the real estate invest- ment trust). (3) Coordination with prohibited transactions safe harbor For purposes of section 857(b)(6)(C)— (A) the real estate investment trust shall be treated as having sold the secured prop- erty when it recognizes any income de- scribed in paragraph (1), and (B) any expenditures made by any holder of the secured property shall be treated as made by the real estate investment trust. (4) Coordination with 4-year holding period (A) In general For purposes of section 857(b)(6)(C), if a real estate investment trust is treated as having sold secured property under para- graph (3)(A), the trust shall be treated as having held such property for at least 4 years if— (i) the secured property is sold or other- wise disposed of pursuant to a case under title 11 of the United States Code, (ii) the seller is under the jurisdiction of the court in such case, and (iii) the disposition is required by the court or is pursuant to a plan approved by the court. (B) Exception Subparagraph (A) shall not apply if— (i) the secured property was acquired by the seller with the intent to evict or fore- close, or (ii) the trust knew or had reason to know that default on the obligation described in paragraph (5)(A) would occur. (5) Definitions For purposes of this subsection— (A) Shared appreciation provision The term ‘‘shared appreciation provision’’ means any provision— (i) which is in connection with an obliga- tion which is held by the real estate in- vestment trust and is secured by an inter- est in real property, and (ii) which entitles the real estate invest- ment trust to receive a specified portion of any gain realized on the sale or exchange of such real property (or of any gain which would be realized if the property were sold on a specified date) or appreciation in value as of any specified date. (B) Secured property The term ‘‘secured property’’ means the real property referred to in subparagraph (A). (k) Requirement that entity not be closely held treated as met in certain cases A corporation, trust, or association— (1) which for a taxable year meets the re- quirements of section 857(f)(1), and (2) which does not know, or exercising rea- sonable diligence would not have known, whether the entity failed to meet the require- ment of subsection (a)(6), shall be treated as having met the requirement of subsection (a)(6) for the taxable year. (l) Taxable REIT subsidiary For purposes of this part— (1) In general The term ‘‘taxable REIT subsidiary’’ means, with respect to a real estate investment trust, a corporation (other than a real estate invest- ment trust) if— Page 1987 TITLE 26—INTERNAL REVENUE CODE § 856 (A) such trust directly or indirectly owns stock in such corporation, and (B) such trust and such corporation jointly elect that such corporation shall be treated as a taxable REIT subsidiary of such trust for purposes of this part. Such an election, once made, shall be irrev- ocable unless both such trust and corporation consent to its revocation. Such election, and any revocation thereof, may be made without the consent of the Secretary. (2) Thirty-five percent ownership in another taxable REIT subsidiary The term ‘‘taxable REIT subsidiary’’ in- cludes, with respect to any real estate invest- ment trust, any corporation (other than a real estate investment trust) with respect to which a taxable REIT subsidiary of such trust owns directly or indirectly— (A) securities possessing more than 35 per- cent of the total voting power of the out- standing securities of such corporation, or (B) securities having a value of more than 35 percent of the total value of the out- standing securities of such corporation. The preceding sentence shall not apply to a qualified REIT subsidiary (as defined in sub- section (i)(2)). For purposes of subparagraph (B), securities described in subsection (m)(2)(A) shall not be taken into account. (3) Exceptions The term ‘‘taxable REIT subsidiary’’ shall not include— (A) any corporation which directly or indi- rectly operates or manages a lodging facility or a health care facility, and (B) any corporation which directly or indi- rectly provides to any other person (under a franchise, license, or otherwise) rights to any brand name under which any lodging fa- cility or health care facility is operated. Subparagraph (B) shall not apply to rights provided to an eligible independent contractor to operate or manage a lodging facility or a health care facility if such rights are held by such corporation as a franchisee, licensee, or in a similar capacity and such lodging facility or health care facility is either owned by such corporation or is leased to such corporation from the real estate investment trust. (4) Definitions For purposes of paragraph (3)— (A) Lodging facility The term ‘‘lodging facility’’ has the mean- ing given to such term by subsection (d)(9)(D)(ii). (B) Health care facility The term ‘‘health care facility’’ has the meaning given to such term by subsection (e)(6)(D)(ii). (m) Safe harbor in applying subsection (c)(4) (1) In general In applying subclause (III) of subsection (c)(4)(B)(iv), except as otherwise determined by the Secretary in regulations, the following shall not be considered securities held by the trust: (A) Straight debt securities of an issuer which meet the requirements of paragraph (2). (B) Any loan to an individual or an estate. (C) Any section 467 rental agreement (as defined in section 467(d)), other than with a person described in subsection (d)(2)(B). (D) Any obligation to pay rents from real property (as defined in subsection (d)(1)). (E) Any security issued by a State or any political subdivision thereof, the District of Columbia, a foreign government or any po- litical subdivision thereof, or the Common- wealth of Puerto Rico, but only if the deter- mination of any payment received or ac- crued under such security does not depend in whole or in part on the profits of any entity not described in this subparagraph or pay- ments on any obligation issued by such an entity, (F) Any security issued by a real estate in- vestment trust. (G) Any other arrangement as determined by the Secretary. (2) Special rules relating to straight debt secu- rities (A) In general For purposes of paragraph (1)(A), securi- ties meet the requirements of this paragraph if such securities are straight debt, as de- fined in section 1361(c)(5) (without regard to subparagraph (B)(iii) thereof). (B) Special rules relating to certain contin- gencies For purposes of subparagraph (A), any in- terest or principal shall not be treated as failing to satisfy section 1361(c)(5)(B)(i) sole- ly by reason of the fact that— (i) the time of payment of such interest or principal is subject to a contingency, but only if— (I) any such contingency does not have the effect of changing the effective yield to maturity, as determined under section 1272, other than a change in the annual yield to maturity which does not exceed the greater of 1⁄4 of 1 percent or 5 percent of the annual yield to maturity, or (II) neither the aggregate issue price nor the aggregate face amount of the issuer’s debt instruments held by the trust exceeds $1,000,000 and not more than 12 months of unaccrued interest can be required to be prepaid thereunder, or (ii) the time or amount of payment is subject to a contingency upon a default or the exercise of a prepayment right by the issuer of the debt, but only if such contin- gency is consistent with customary com- mercial practice. (C) Special rules relating to corporate or partnership issuers In the case of an issuer which is a corpora- tion or a partnership, securities that other- wise would be described in paragraph (1)(A) shall be considered not to be so described if Page 1988 TITLE 26—INTERNAL REVENUE CODE § 856 the trust holding such securities and any of its controlled taxable REIT subsidiaries (as defined in subsection (d)(8)(A)(iv)) hold any securities of the issuer which— (i) are not described in paragraph (1) (prior to the application of this subpara- graph), and (ii) have an aggregate value greater than 1 percent of the issuer’s outstanding secu- rities determined without regard to para- graph (3)(A)(i). (3) Look-through rule for partnership securi- ties (A) In general For purposes of applying subclause (III) of subsection (c)(4)(B)(iv)— (i) a trust’s interest as a partner in a partnership (as defined in section 7701(a)(2)) shall not be considered a secu- rity, and (ii) the trust shall be deemed to own its proportionate share of each of the assets of the partnership. (B) Determination of trust’s interest in part- nership assets For purposes of subparagraph (A), with re- spect to any taxable year beginning after the date of the enactment of this subpara- graph— (i) the trust’s interest in the partnership assets shall be the trust’s proportionate interest in any securities issued by the partnership (determined without regard to subparagraph (A)(i) and paragraph (4), but not including securities described in para- graph (1)), and (ii) the value of any debt instrument shall be the adjusted issue price thereof, as defined in section 1272(a)(4). (4) Certain partnership debt instruments not treated as a security For purposes of applying subclause (III) of subsection (c)(4)(B)(iv)— (A) any debt instrument issued by a part- nership and not described in paragraph (1) shall not be considered a security to the ex- tent of the trust’s interest as a partner in the partnership, and (B) any debt instrument issued by a part- nership and not described in paragraph (1) shall not be considered a security if at least 75 percent of the partnership’s gross income (excluding gross income from prohibited transactions) is derived from sources re- ferred to in subsection (c)(3). (5) Secretarial guidance The Secretary is authorized to provide guid- ance (including through the issuance of a writ- ten determination, as defined in section 6110(b)) that an arrangement shall not be con- sidered a security held by the trust for pur- poses of applying subclause (III) of subsection (c)(4)(B)(iv) notwithstanding that such ar- rangement otherwise could be considered a se- curity under subparagraph (F) of subsection (c)(5). (n) Rules regarding foreign currency trans- actions (1) In general For purposes of this part— (A) passive foreign exchange gain for any taxable year shall not constitute gross in- come for purposes of subsection (c)(2), and (B) real estate foreign exchange gain for any taxable year shall not constitute gross income for purposes of subsection (c)(3). (2) Real estate foreign exchange gain For purposes of this subsection, the term ‘‘real estate foreign exchange gain’’ means— (A) foreign currency gain (as defined in section 988(b)(1)) which is attributable to— (i) any item of income or gain described in subsection (c)(3), (ii) the acquisition or ownership of obli- gations secured by mortgages on real prop- erty or on interests in real property (other than foreign currency gain attributable to any item of income or gain described in clause (i)), or (iii) becoming or being the obligor under obligations secured by mortgages on real property or on interests in real property (other than foreign currency gain attrib- utable to any item of income or gain de- scribed in clause (i)), (B) section 987 gain attributable to a quali- fied business unit (as defined by section 989) of the real estate investment trust, but only if such qualified business unit meets the re- quirements under— (i) subsection (c)(3) for the taxable year, and (ii) subsection (c)(4)(A) at the close of each quarter that the real estate invest- ment trust has directly or indirectly held the qualified business unit, and (C) any other foreign currency gain as de- termined by the Secretary. (3) Passive foreign exchange gain For purposes of this subsection, the term ‘‘passive foreign exchange gain’’ means— (A) real estate foreign exchange gain, (B) foreign currency gain (as defined in section 988(b)(1)) which is not described in subparagraph (A) and which is attributable to— (i) any item of income or gain described in subsection (c)(2), (ii) the acquisition or ownership of obli- gations (other than foreign currency gain attributable to any item of income or gain described in clause (i)), or (iii) becoming or being the obligor under obligations (other than foreign currency gain attributable to any item of income or gain described in clause (i)), and (C) any other foreign currency gain as de- termined by the Secretary. (4) Exception for income from substantial and regular trading Notwithstanding this subsection or any other provision of this part, any section 988 gain derived by a corporation, trust, or asso- ciation from dealing, or engaging in substan- tial and regular trading, in securities (as de- fined in section 475(c)(2)) shall constitute gross income which does not qualify under para- graph (2) or (3) of subsection (c). This para- Page 1989 TITLE 26—INTERNAL REVENUE CODE § 856 graph shall not apply to income which does not constitute gross income by reason of sub- section (c)(5)(G). (Added Pub. L. 86–779, § 10(a), Sept. 14, 1960, 74 Stat. 1004; amended Pub. L. 88–272, title II, § 225(k)(4), Feb. 26, 1964, 78 Stat. 94; Pub. L. 88–554, § 4(b)(4), Aug. 31, 1964, 78 Stat. 763; Pub. L. 93–625, § 6(a), (b), (d)(1), Jan. 3, 1975, 88 Stat. 2112–2114; Pub. L. 94–455, title XIV, § 1402(b)(1)(O), (2), title XVI, §§ 1602(a), 1603(a), (c)(1)–(4), 1604(a)–(c)(1), (d)–(f)(3)(A), (g), (k)(1), (2)(A), title XIX, §§ 1901(a)(111), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1732, 1746, 1748–1753, 1783, 1834; Pub. L. 95–600, title III, § 363(a), (c), title VII, § 701(t)(2), Nov. 6, 1978, 92 Stat. 2852, 2853, 2912; Pub. L. 98–369, div. A, title X, § 1001(b)(12), (e), July 18, 1984, 98 Stat. 1011, 1012; Pub. L. 99–514, title VI, §§ 661(a), 662, 663, 671(b)(1), title IX, § 901(d)(4)(E), Oct. 22, 1986, 100 Stat. 2299, 2300, 2302, 2317, 2380; Pub. L. 100–647, title I, § 1006(p)(1), (3), (4)(A), (5), (q), (t)(11), Nov. 10, 1988, 102 Stat. 3416, 3417, 3422; Pub. L. 103–66, title XIII, § 13149(a), Aug. 10, 1993, 107 Stat. 445; Pub. L. 104–188, title I, §§ 1621(b)(5), 1704(t)(35), Aug. 20, 1996, 110 Stat. 1867, 1889; Pub. L. 105–34, title XII, §§ 1251(b)–1253, 1255(a), (b)(1), 1257, 1258, 1261, 1262, Aug. 5, 1997, 111 Stat. 1031–1036; Pub. L. 106–170, title V, §§ 532(c)(2)(H)–(K), 541–542(b)(3)(A)(i), (B)(i), 543, 551(a), 561(a), Dec. 17, 1999, 113 Stat. 1930, 1940–1943, 1948, 1949; Pub. L. 106–554, § 1(a)(7) [title III, § 319(9), (10)], Dec. 21, 2000, 114 Stat. 2763, 2763A–646; Pub. L. 108–357, title II, § 243(a), (b), (d), (f)(1)–(3), title VIII, § 835(b)(4), Oct. 22, 2004, 118 Stat. 1439, 1441–1444, 1593; Pub. L. 109–135, title IV, §§ 403(d)(1), (2), 412(hh), Dec. 21, 2005, 119 Stat. 2620, 2622, 2639; Pub. L. 110–172, §§ 9(b), 11(a)(18), Dec. 29, 2007, 121 Stat. 2484, 2486; Pub. L. 110–234, title XV, §§ 15312(a), (b), 15313(a), (b), 15314(a), May 22, 2008, 122 Stat. 1503, 1504; Pub. L. 110–246, § 4(a), title XV, §§ 15312(a), (b), 15313(a), (b), 15314(a), June 18, 2008, 122 Stat. 1664, 2265, 2266; Pub. L. 110–289, div. C, title II, §§ 3031, 3032, 3041, 3061, July 30, 2008, 122 Stat. 2897, 2899–2901; Pub. L. 114–113, div. Q, title III, §§ 311(b), 312(a), 317(a), (b), 318(a), 319(a), (b), 321(a)(3), Dec. 18, 2015, 129 Stat. 3090, 3091, 3094–3097; Pub. L. 115–141, div. U, title I, § 101(n), title IV, § 401(a)(146), (147), (b)(28), Mar. 23, 2018, 132 Stat. 1165, 1191, 1203.) Editorial Notes REFERENCES IN TEXT The date of the enactment of this subparagraph, re- ferred to in subsec. (c)(2)(I), is the date of enactment of Pub. L. 110–246, which was approved June 18, 2008. The Investment Company Act of 1940, referred to in subsec. (c)(5)(F), is title I of act Aug. 22, 1940, ch. 686, 54 Stat. 789, which is classified generally to subchapter I (§ 80a–1 et seq.) of chapter 2D of Title 15, Commerce and Trade. For complete classification of this Act to the Code, see section 80a–51 of Title 15 and Tables. The date of the enactment of this paragraph and such date of enactment, referred to in subsec. (c)(10), is the date of enactment of Pub. L. 110–246, which was ap- proved June 18, 2008. The Social Security Act, referred to in subsec. (e)(6)(D)(ii), is act Aug. 14, 1935, ch. 531, 49 Stat. 620. Title XVIII of the Act is classified generally to sub- chapter XVIII (§ 1395 et seq.) of chapter 7 of Title 42, The Public Health and Welfare. For complete classi- fication of this Act to the Code, see section 1305 of Title 42 and Tables. The date of the enactment of this subparagraph, re- ferred to in subsec. (m)(3)(B), is the date of enactment of Pub. L. 108–357, which was approved Oct. 22, 2004. CODIFICATION Pub. L. 110–234 and Pub. L. 110–246 made identical amendments to this section. The amendments by Pub. L. 110–234 were repealed by section 4(a) of Pub. L. 110–246. AMENDMENTS 2018—Subsec. (c)(7)(A), (B). Pub. L. 115–141, § 401(a)(146), in introductory provisions, substituted ‘‘paragraph (4)(B)(iv)’’ for ‘‘paragraph (4)(B)(iii)’’. Subsec. (c)(9)(A). Pub. L. 115–141, § 101(n)(1), des- ignated existing provisions as cl. (i), inserted heading, and added cl. (ii). Subsec. (c)(9)(B). Pub. L. 115–141, § 101(n)(2), amended subpar. (B) generally. Prior to amendment, subpar. (B) related to certain personal property mortgaged in con- nection with real property. Subsec. (m)(1), (3)(A), (4). Pub. L. 115–141, § 401(a)(147), in introductory provisions, substituted ‘‘subsection (c)(4)(B)(iv)’’ for ‘‘subsection (c)(4)(B)(iii)’’. Subsec. (m)(5). Pub. L. 115–141, § 401(a)(147), sub- stituted ‘‘subsection (c)(4)(B)(iv)’’ for ‘‘subsection (c)(4)(B)(iii)’’. Subsec. (m)(6). Pub. L. 115–141, § 401(b)(28), struck out par. (6) which related to transition rule. 2015—Subsec. (c)(3)(H). Pub. L. 114–113, § 317(a)(2), in- serted ‘‘(other than a nonqualified publicly offered REIT debt instrument)’’ after ‘‘real estate asset’’. Subsec. (c)(4)(B)(ii). Pub. L. 114–113, § 312(a), sub- stituted ‘‘20 percent’’ for ‘‘25 percent’’. Subsec. (c)(4)(B)(iii), (iv). Pub. L. 114–113, § 317(a)(3), added cl. (iii) and redesignated former cl. (iii) as (iv). Subsec. (c)(5)(B). Pub. L. 114–113, § 317(a)(1), (b), in- serted ‘‘or on interests in real property’’ after ‘‘inter- ests in mortgages on real property’’, substituted ‘‘, shares’’ for ‘‘and shares’’, and inserted ‘‘, and debt instruments issued by publicly offered REITs’’ before period at end of first sentence. Subsec. (c)(5)(G)(i). Pub. L. 114–113, § 319(b)(2)(A), struck out ‘‘which is clearly identified pursuant to sec- tion 1221(a)(7)’’ after ‘‘of section 1221(b)(2)(A))’’. Subsec. (c)(5)(G)(ii). Pub. L. 114–113, § 319(b)(2)(B), struck out before period at end ‘‘, but only if such transaction is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may prescribe)’’. Subsec. (c)(5)(G)(iii). Pub. L. 114–113, § 319(a), added cl. (iii). Subsec. (c)(5)(G)(iv). Pub. L. 114–113, § 319(b)(1), added cl. (iv). Subsec. (c)(5)(L). Pub. L. 114–113, § 317(a)(4), added sub- par. (L). Subsec. (c)(8). Pub. L. 114–113, § 311(b), added par. (8). Former par. (8) redesignated (9). Subsec. (c)(9). Pub. L. 114–113, § 318(a), added par. (9). Former par. (9) redesignated (10). Pub. L. 114–113, § 311(b), redesignated par. (8) as (9). Subsec. (c)(10). Pub. L. 114–113, § 318(a), redesignated par. (9) as (10). Subsec. (e)(4)(C). Pub. L. 114–113, § 321(a)(3), inserted ‘‘or through a taxable REIT subsidiary’’ after ‘‘receive any income’’. 2008—Subsec. (c)(2)(I). Pub. L. 110–246, § 15313(a), added subpar. (I). Subsec. (c)(4). Pub. L. 110–289, § 3032(a), inserted ‘‘(in- cluding a discrepancy caused solely by the change in the foreign currency exchange rate used to value a for- eign asset)’’ after ‘‘such requirements’’ in first sentence of concluding provisions. Subsec. (c)(4)(B)(ii). Pub. L. 110–289, § 3041, substituted ‘‘than 25 percent’’ for ‘‘than 20 percent’’ and ‘‘REIT sub- sidiaries,’’ for ‘‘REIT subsidiaries (in the case of a quar- ter which closes on or before the termination date, 25 percent in the case of a timber real estate investment trust), and’’. Page 1990 TITLE 26—INTERNAL REVENUE CODE § 856 Pub. L. 110–246, § 15314(a), inserted ‘‘(in the case of a quarter which closes on or before the termination date, 25 percent in the case of a timber real estate invest- ment trust)’’ after ‘‘REIT subsidiaries’’. Subsec. (c)(5)(G). Pub. L. 110–289, § 3031(b), amended subpar. (G) generally. Prior to amendment, text read as follows: ‘‘Except to the extent provided by regulations, any income of a real estate investment trust from a hedging transaction (as defined in clause (ii) or (iii) of section 1221(b)(2)(A)) which is clearly identified pursu- ant to section 1221(a)(7), including gain from the sale or disposition of such a transaction, shall not constitute gross income under paragraph (2) to the extent that the transaction hedges any indebtedness incurred or to be incurred by the trust to acquire or carry real estate as- sets.’’ Subsec. (c)(5)(H). Pub. L. 110–246, § 15312(a), added sub- par. (H). Subsec. (c)(5)(I). Pub. L. 110–246, § 15313(b), added sub- par. (I). Subsec. (c)(5)(J). Pub. L. 110–289, § 3031(c), added sub- par. (J). Subsec. (c)(5)(K). Pub. L. 110–289, § 3032(b), added sub- par. (K). Subsec. (c)(8). Pub. L. 110–246, § 15312(b), added par. (8). Subsec. (d)(8)(B). Pub. L. 110–289, § 3061(a), amended subpar. (B) generally. Prior to amendment, text read as follows: ‘‘The requirements of this subparagraph are met with respect to an interest in real property which is a qualified lodging facility leased by the trust to a taxable REIT subsidiary of the trust if the property is operated on behalf of such subsidiary by a person who is an eligible independent contractor.’’ Subsec. (d)(9)(A), (B). Pub. L. 110–289, § 3061(b), amend- ed subpars. (A) and (B) generally. Prior to amendment, subpar. (A) defined ‘‘eligible independent contractor’’ with respect to any qualified lodging facility and sub- par. (B) set forth reasons by which a person would not fail to be treated as an independent contractor with re- spect to any qualified lodging facility. Subsec. (l)(3). Pub. L. 110–289, § 3061(c), inserted ‘‘or a health care facility’’ after ‘‘a lodging facility’’ and ‘‘or health care facility’’ after ‘‘such lodging facility’’ in concluding provisions. Subsec. (n). Pub. L. 110–289, § 3031(a), added subsec. (n). 2007—Subsec. (d)(9)(D)(ii). Pub. L. 110–172, § 9(b), reen- acted heading without change and amended text gen- erally. Prior to amendment, text read as follows: ‘‘The term ‘lodging facility’ means a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis.’’ Subsec. (l)(2). Pub. L. 110–172, § 11(a)(18), in concluding provisions, inserted last sentence and struck out former last sentence which read as follows: ‘‘The rule of section 856(c)(7) shall apply for purposes of subpara- graph (B).’’ 2005—Subsec. (c)(7). Pub. L. 109–135, § 403(d)(1), reen- acted heading without change and amended text gen- erally. Prior to amendment, text consisted of subpars. (A) to (C) relating to rules of application for a corpora- tion, trust, or association that fails to satisfy the re- quirements of paragraph (4) of this subsection. Subsec. (g)(5)(A). Pub. L. 109–135, § 412(hh), substituted ‘‘paragraph (2), (3), or (4) of subsection (c)’’ for ‘‘sub- section (c)(6) or (c)(7) of section 856’’. Subsec. (m)(6). Pub. L. 109–135, § 403(d)(2), added par. (6). 2004—Subsec. (c)(5)(E). Pub. L. 108–357, § 835(b)(4), struck out last sentence which read as follows: ‘‘The principles of the preceding provisions of this subpara- graph shall apply to regular interests in a FASIT.’’ Subsec. (c)(5)(G). Pub. L. 108–357, § 243(d), reenacted heading without change and amended text of subpar. (G) generally. Prior to amendment, subpar. (G) pro- vided that, except to the extent provided by regula- tions, payment to a real estate investment trust under an interest rate swap or cap agreement, option, futures contract, forward rate agreement, or any similar finan- cial instrument, entered into by the trust in a trans- action to reduce the interest rate risks with respect to any indebtedness incurred or to be incurred by the trust to acquire or carry real estate assets, and gain from the sale or other disposition of any such invest- ment, would be treated as income qualifying under par. (2). Subsec. (c)(6)(A). Pub. L. 108–357, § 243(f)(2), added sub- par. (A) and struck out former subpar. (A) which read as follows: ‘‘the nature and amount of each item of its gross income described in such paragraphs is set forth in a schedule attached to its income tax return for such taxable year;’’. Subsec. (c)(6)(B), (C). Pub. L. 108–357, § 243(f)(2), redes- ignated subpar. (C) as (B) and struck out former subpar. (B) which read as follows: ‘‘the inclusion of any incor- rect information in the schedule referred to in subpara- graph (A) is not due to fraud with intent to evade tax; and’’. Subsec. (c)(7). Pub. L. 108–357, § 243(f)(1), added par. (7). Pub. L. 108–357, § 243(a)(1), struck out par. (7) which provided that securities of an issuer which were straight debt would not be taken into account in apply- ing paragraph (4)(B)(iii)(III), if the issuer was an indi- vidual, if the only securities of such issuer which were held by the trust or a taxable REIT subsidiary of the trust were straight debt, or if the issuer was a partner- ship and the trust held at least a 20 percent profits in- terest in the partnership. Subsec. (d)(8)(A). Pub. L. 108–357, § 243(b), reenacted heading without change and amended text of subpar. (A) generally. Prior to amendment, text read as fol- lows: ‘‘The requirements of this subparagraph are met with respect to any property if at least 90 percent of the leased space of the property is rented to persons other than taxable REIT subsidiaries of such trust and other than persons described in section 856(d)(2)(B). The preceding sentence shall apply only to the extent that the amounts paid to the trust as rents from real prop- erty (as defined in paragraph (1) without regard to paragraph (2)(B)) from such property are substantially comparable to such rents made by the other tenants of the trust’s property for comparable space.’’ Subsec. (g)(1). Pub. L. 108–357, § 243(f)(3)(A), inserted ‘‘unless paragraph (5) applies’’ before ‘‘. Such termi- nation’’. Subsec. (g)(5). Pub. L. 108–357, § 243(f)(3)(B), added par. (5). Subsec. (m). Pub. L. 108–357, § 243(a)(2), added subsec. (m). 2000—Subsec. (c)(7). Pub. L. 106–554, § 1(a)(7) [title III, § 319(9)], substituted ‘‘paragraph (4)(B)(iii)(III)’’ for ‘‘paragraph (4)(B)(ii)(III)’’ in introductory provisions. Subsec. (l)(4)(A). Pub. L. 106–554, § 1(a)(7) [title III, § 319(10)], substituted ‘‘subsection (d)(9)(D)(ii)’’ for ‘‘paragraph (9)(D)(ii)’’. 1999—Subsec. (c)(2)(D), (3)(C). Pub. L. 106–170, § 532(c)(2)(H), (I), substituted ‘‘section 1221(a)(1)’’ for ‘‘section 1221(1)’’. Subsec. (c)(4)(B). Pub. L. 106–170, § 541(a), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: ‘‘not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A)) for pur- poses of this calculation limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the trust and to not more than 10 percent of the outstanding voting securi- ties of such issuer.’’ Subsec. (c)(7). Pub. L. 106–170, § 541(b), added par. (7). Subsec. (d)(1). Pub. L. 106–170, § 542(b)(3)(A)(i), sub- stituted ‘‘fair market values’’ for ‘‘adjusted bases’’ in two places in concluding provisions. Subsec. (d)(2)(B). Pub. L. 106–170, § 542(b)(2), inserted ‘‘except as provided in paragraph (8),’’ after ‘‘(B)’’ in in- troductory provisions. Subsec. (d)(2)(B)(i). Pub. L. 106–170, § 542(b)(3)(B)(i), substituted ‘‘value’’ for ‘‘number’’. Subsec. (d)(3). Pub. L. 106–170, § 561(a), inserted con- cluding provisions. Subsec. (d)(7)(C)(i). Pub. L. 106–170, § 542(a), inserted ‘‘or through a taxable REIT subsidiary of such trust’’ after ‘‘income’’. Page 1991 TITLE 26—INTERNAL REVENUE CODE § 856 Subsec. (d)(8), (9). Pub. L. 106–170, § 542(b)(1), added pars. (8) and (9). Subsec. (e)(1). Pub. L. 106–170, § 532(c)(2)(J), sub- stituted ‘‘section 1221(a)(1)’’ for ‘‘section 1221(1)’’. Subsec. (e)(6). Pub. L. 106–170, § 551(a), added par. (6). Subsec. (i)(2). Pub. L. 106–170, § 543(b), inserted at end ‘‘Such term shall not include a taxable REIT sub- sidiary.’’ Subsec. (j)(2)(B). Pub. L. 106–170, § 532(c)(2)(K), sub- stituted ‘‘section 1221(a)(1)’’ for ‘‘section 1221(1)’’. Subsec. (l). Pub. L. 106–170, § 543(a), added subsec. (l). 1997—Subsec. (a)(6). Pub. L. 105–34, § 1251(b)(2), in- serted ‘‘subject to the provisions of subsection (k),’’ be- fore ‘‘which is not’’. Subsec. (c)(3)(I). Pub. L. 105–34, § 1255(a)(1), inserted ‘‘and’’ at end. Subsec. (c)(4). Pub. L. 105–34, § 1255(a)(2), (3), redesig- nated par. (5) as (4) and struck out former par. (4) which read as follows: ‘‘less than 30 percent of its gross in- come is derived from the sale or other disposition of— ‘‘(A) stock or securities held for less than 1 year; ‘‘(B) property in a transaction which is a prohibited transaction; and ‘‘(C) real property (including interests in real prop- erty and interests in mortgages on real property) held for less than 4 years other than— ‘‘(i) property compulsorily or involuntarily con- verted within the meaning of section 1033, and ‘‘(ii) property which is foreclosure property with- in the definition of section 856(e); and’’. Subsec. (c)(5). Pub. L. 105–34, § 1255(a)(3), redesignated par. (6) as (5). Former par. (5) redesignated (4). Subsec. (c)(5)(G). Pub. L. 105–34, § 1258, amended head- ing and text of subpar. (G) generally. Prior to amend- ment, text read as follows: ‘‘Except to the extent pro- vided by regulations, any— ‘‘(i) payment to a real estate investment trust under a bona fide interest rate swap or cap agreement entered into by the real estate investment trust to hedge any variable rate indebtedness of such trust in- curred or to be incurred to acquire or carry real es- tate assets, and ‘‘(ii) any gain from the sale or other disposition of such agreement, shall be treated as income qualifying under paragraph (2).’’ Pub. L. 105–34, § 1255(b)(1), struck out ‘‘and such agree- ment shall be treated as a security for purposes of para- graph (4)(A)’’ after ‘‘under paragraph (2)’’ in concluding provisions. Subsec. (c)(6), (7). Pub. L. 105–34, § 1255(a)(3), redesig- nated par. (7) as (6). Former par. (6) redesignated (5). Subsec. (c)(8). Pub. L. 105–34, § 1255(a)(2), struck out heading and text of par. (8). Text read as follows: ‘‘In the case of the taxable year in which a real estate in- vestment trust is completely liquidated, there shall not be taken into account under paragraph (4) any gain from the sale, exchange, or distribution of any property after the adoption of the plan of complete liquidation.’’ Subsec. (d)(2). Pub. L. 105–34, § 1252(a), added subpar. (C) and struck out former subpar. (C) and concluding provisions which read as follows: ‘‘(C) any amount received or accrued, directly or in- directly, with respect to any real or personal prop- erty if the real estate investment trust furnishes or renders services to the tenants of such property, or manages or operates such property, other than through an independent contractor from whom the trust itself does not derive or receive any income. Subparagraph (C) shall not apply with respect to any amount if such amount would be excluded from unre- lated business taxable income under section 512(b)(3) if received by an organization described in section 511(a)(2).’’ Subsec. (d)(5). Pub. L. 105–34, § 1253, substituted ‘‘ex- cept that—’’ and subpars. (A) and (B) for ‘‘except that ‘10 percent’ shall be substituted for ‘50 percent’ in sub- paragraph (C) of section 318(a)(2) and 318(a)(3).’’ Subsec. (d)(7). Pub. L. 105–34, § 1252(b), added par. (7). Subsec. (e)(2). Pub. L. 105–34, § 1257(a)(1), which di- rected amendment of par. (2) by substituting ‘‘as of the close of the 3d taxable year following the taxable year in which the trust acquired such property’’ for ‘‘on the date which is 2 years after the date the trust acquired such property’’, was executed by making the substi- tution for ‘‘on the date which is 2 years after the date such trust acquired such property’’ to reflect the prob- able intent of Congress. Subsec. (e)(3). Pub. L. 105–34, § 1257(a)(2), substituted ‘‘grant one extension’’ for ‘‘grant one or more exten- sions’’ and ‘‘Any such extension shall not extend the grace period beyond the close of the 3d taxable year fol- lowing the last taxable year in the period under para- graph (2).’’ for ‘‘Any such extension shall not extend the grace period beyond the date which is 6 years after the date such trust acquired such property.’’ Subsec. (e)(4). Pub. L. 105–34, § 1257(c), inserted con- cluding provisions ‘‘For purposes of subparagraph (C), property shall not be treated as used in a trade or busi- ness by reason of any activities of the real estate in- vestment trust with respect to such property to the ex- tent that such activities would not result in amounts received or accrued, directly or indirectly, with respect to such property being treated as other than rents from real property.’’ Subsec. (e)(5). Pub. L. 105–34, § 1257(b), substituted ‘‘A real estate investment trust may revoke any such elec- tion for a taxable year by filing the revocation (in the manner provided by the Secretary) on or before the due date (including any extension of time) for filing its re- turn of tax under this chapter for the taxable year. If a trust revokes an election for any property, no elec- tion may be made by the trust under this paragraph with respect to the property for any subsequent taxable year.’’ for ‘‘Any such election shall be irrevocable.’’ Subsec. (i)(2). Pub. L. 105–34, § 1262, struck out ‘‘at all times during the period such corporation was in exist- ence’’ after ‘‘real estate investment trust’’. Subsec. (j)(4). Pub. L. 105–34, § 1261(a), added par. (4). Former par. (4) redesignated (5). Subsec. (j)(5). Pub. L. 105–34, § 1261(a), redesignated par. (4) as (5). Subsec. (j)(5)(A)(ii). Pub. L. 105–34, § 1261(b), inserted before period at end ‘‘or appreciation in value as of any specified date’’. Subsec. (k). Pub. L. 105–34, § 1251(b)(1), added subsec. (k). 1996—Subsec. (a)(4). Pub. L. 104–188, § 1704(t)(35), sub- stituted ‘‘section 582(c)(2)’’ for ‘‘section 582(c)(5)’’. Subsec. (c)(6)(E). Pub. L. 104–188, § 1621(b)(5), inserted at end ‘‘The principles of the preceding provisions of this subparagraph shall apply to regular interests in a FASIT.’’ 1993—Subsec. (h)(3). Pub. L. 103–66 added par. (3). 1988—Subsec. (c)(6)(D). Pub. L. 100–647, § 1006(t)(11), struck out subpar. (D), as added by Pub. L. 99–514, § 671(b)(1), which read as follows: ‘‘A regular or residual interest in a REMIC shall be treated as an interest in real property, and any amount includible in gross in- come with respect to such an interest shall be treated as interest; except that, if less than 95 percent of the assets of such REMIC are interests in real property (de- termined as if the taxpayer held such assets), such in- terest shall be so treated only in the proportion which the assets of the REMIC consist of such interests.’’ Subsec. (c)(6)(D)(i)(I). Pub. L. 100–647, § 1006(p)(1), sub- stituted ‘‘debt instrument (within the meaning of sec- tion 1275(a)(1))’’ for ‘‘debt instrument’’. Subsec. (c)(6)(D)(ii)(I). Pub. L. 100–647, § 1006(p)(5), sub- stituted ‘‘stock (or certificates of beneficial interests) in such trust’’ for ‘‘stock in such trust’’. Subsec. (c)(6)(E), (F). Pub. L. 100–647, § 1006(t)(11), added subpar. (E) and redesignated former subpar. (E) as (F). Subsec. (c)(6)(G). Pub. L. 100–647, § 1006(p)(4)(A), added subpar. (G). Subsec. (c)(8). Pub. L. 100–647, § 1006(p)(3), added par. (8). Subsec. (d)(6)(A). Pub. L. 100–647, § 1006(q)(1), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: ‘‘If— Page 1992 TITLE 26—INTERNAL REVENUE CODE § 856 ‘‘(i) a real estate investment trust receives or ac- crues, with respect to real or personal property, amounts from a tenant which derives substantially all of its income with respect to such property from the subleasing of substantially all of such property, and ‘‘(ii) such tenant receives or accrues, directly or in- directly, from subtenants only amounts which are qualified rents, then the amounts that the trust receives or accrues from the tenant shall not be excluded from the term ‘rents from real property’ solely by reason of being based on the income or profits of such tenant.’’ Subsec. (f). Pub. L. 100–647, § 1006(q)(2), amended sub- sec. (f) generally, making changes in content and struc- ture. 1986—Subsec. (a)(4). Pub. L. 99–514, § 901(d)(4)(E), sub- stituted ‘‘referred to in section 582(c)(5)’’ for ‘‘to which section 585, 586, or 593 applies’’. Subsec. (a)(6). Pub. L. 99–514, § 661(a)(1), amended par. (6) generally. Prior to amendment, par. (6) read as fol- lows: ‘‘which would not be a personal holding company (as defined in section 542) if all of its adjusted ordinary gross income (as defined in section 543(b)(2)) con- stituted personal holding company income (as defined in section 543); and’’. Subsec. (c)(3)(I). Pub. L. 99–514, § 662(b)(1), added sub- par. (I). Subsec. (c)(6)(B). Pub. L. 99–514, § 662(b)(2), inserted ‘‘Such term also includes any property (not otherwise a real estate asset) attributable to the temporary in- vestment of new capital, but only if such property is stock or a debt instrument, and only for the 1-year pe- riod beginning on the date the real estate trust receives such capital.’’ Subsec. (c)(6)(D). Pub. L. 99–514, § 671(b)(1), added sub- par. (D) relating to REMIC interest. Former subpar. (D) redesignated (E). Pub. L. 99–514, § 662(b)(3), added subpar. (D) relating to qualified temporary investment income. Former sub- par. (D) redesignated (E). Subsec. (c)(6)(E). Pub. L. 99–514, §§ 662(b)(3), 671(b)(1), made identical redesignations of former subpar. (D) as (E). Subsec. (d)(2). Pub. L. 99–514, § 663(a), (b)(3), inserted reference to par. (6) in subpar. (A) and inserted at end ‘‘Subparagraph (C) shall not apply with respect to any amount if such amount would be excluded from unre- lated business taxable income under section 512(b)(3) if received by an organization described in section 511(a)(2).’’ Subsec. (d)(6). Pub. L. 99–514, § 663(b)(1), added par. (6). Subsec. (f). Pub. L. 99–514, § 663(b)(2), amended subsec. (f) generally, restating former introductory provisions and par. (1) as introductory provisions of par. (1) and as subpar. (A), restating provisions of par. (2), adding sub- par. (1)(B), and striking out former concluding provi- sions which read as follows: ‘‘The provisions of this subsection shall apply only with respect to amounts re- ceived or accrued pursuant to loans made after May 27, 1976. For purposes of the preceding sentence, a loan is considered to be made before May 28, 1976, if such loan is made pursuant to a binding commitment entered into before May 28, 1976.’’ Subsec. (h). Pub. L. 99–514, § 661(a)(2), added subsec. (h). Subsec. (i). Pub. L. 99–514, § 662(a), added subsec. (i). Subsec. (j). Pub. L. 99–514, § 662(c), added subsec. (j). 1984—Subsec. (c)(4)(A). Pub. L. 98–369 substituted ‘‘6 months’’ for ‘‘1 year’’, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below. 1978—Subsec. (c)(2)(H). Pub. L. 95–600, § 363(a)(1), added subpar. (H). Subsec. (c)(3)(D). Pub. L. 95–600, § 701(t)(2), inserted ‘‘(other than gain from prohibited transactions)’’ after ‘‘on, and gain’’. Subsec. (c)(3)(H). Pub. L. 95–600, § 363(a)(2), added sub- par. (H). Subsec. (c)(4)(B). Pub. L. 95–600, § 363(a)(3), substituted ‘‘property in a transaction which is a prohibited trans- action’’ for ‘‘section 1221(1) property (other than fore- closure property)’’. Subsec. (e)(3). Pub. L. 95–600, § 363(c), substituted ‘‘the Secretary may grant one or more extensions of the grace period for such property’’ for ‘‘the Secretary may extend the grace period for such property’’ and ‘‘shall not extend the grace period beyond the date which is 6 years after the date such trust acquired such property’’ for ‘‘shall be for a period of not more than one year, and not more than two extensions shall be granted with respect to any property’’. 1976—Subsec. (a). Pub. L. 94–455, §§ 1603(a), 1604(f)(1), (2), in introductory provisions substituted ‘‘this title’’ for ‘‘this subtitle’’ and ‘‘a corporation, trust, or asso- ciation’’ for ‘‘an unincorporated trust or an unincor- porated association’’, in par. (1) inserted ‘‘or directors’’ after ‘‘trustees’’, and in par. (4) substituted reference to which is neither (A) a financial institution to which section 585, 586, or 593 applies, nor (B) an insurance company to which subchapter L applies for reference to which does not hold any property primarily for sale to customers in the ordinary course of its trade or busi- ness. Subsec. (c). Pub. L. 94–455, § 1604(f)(3)(A), in introduc- tory provision substituted ‘‘A corporation, trust, or as- sociation’’ for ‘‘A trust or association’’. Subsec. (c)(1). Pub. L. 94–455, §§ 1604(k)(2)(A), 1901(a)(111)(A), struck out reference to which began after Dec. 31, 1960 and inserted reference to such elec- tion has not been terminated or revoked under subsec. (g). Subsec. (c)(2). Pub. L. 94–455, §§ 1603(c)(2), 1604(a), (c)(1), in introductory provision substituted ‘‘95 percent (90 percent for taxable years beginning before January 1, 1980) of its gross income (excluding gross income from prohibited transactions)’’ for ‘‘90 percent of its gross income’’, in subpar. (D) inserted reference to which is not property not described in section 1221(1), and added subpar. (G). Subsec. (c)(3). Pub. L. 94–455, §§ 1603(c)(1), (3), 1604(c)(1), in introductory provision inserted ‘‘(exclud- ing gross income from prohibited transactions) 75 per- cent of its gross income’’, in subpar. (C) inserted ref- erence to which is not property described in section 1221(1), and added subpar. (G). Subsec. (c)(4). Pub. L. 94–455, § 1402(b)(2), provided that ‘‘9 months’’ would be changed to ‘‘1 year’’. Pub. L. 94–455, §§ 1402(b)(1)(O), 1604(d), in subpar. (A) provided that ‘‘6 months’’ would be changed to ‘‘9 months’’ for taxable years beginning in 1977, added sub- par. (B), and redesignated former subpar. (B) as (C), and in subpar. (C) as so redesignated, substituted ‘‘(includ- ing interest in real property and interest in mortgages on real property’’ for ‘‘(including interest in real prop- erty)’’ and inserted reference to property which is fore- closure property within the definition of section 856(e). Subsec. (c)(6)(C). Pub. L. 94–455, § 1604(e), inserted ref- erence to options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon. Subsec. (c)(6)(D). Pub. L. 94–455, § 1901(a)(111)(B), in- serted ‘‘(15 U.S.C. 80a–1 and following)’’ after ‘‘, as amended’’. Subsec. (c)(7). Pub. L. 94–455, § 1602(a), added par. (7). Subsec. (d). Pub. L. 94–455, § 1604(b), among other changes, inserted provisions including in definition of rents from real property charges for services custom- arily furnished or rendered in connection with rental of real property and rent attributable to personal prop- erty which is leased under, or in connection with, a lease of real property, provisions relating to the com- putation of the amount of rent attributable to personal property, and provisions relating to the special rule for certain contingent rents. Subsec. (e)(1). Pub. L. 94–455, § 1603(c)(4), inserted pro- vision relating to the exclusion, from definition of fore- closure property, of property acquired by the real es- tate investment trust or other disposition of property of the trust described in section 1221(1) of this title. Subsec. (e)(3), (5). Pub. L. 94–455, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Secretary’’ each time appearing. Page 1993 TITLE 26—INTERNAL REVENUE CODE § 856 Subsec. (f). Pub. L. 94–455, § 1604(g), added subsec. (f). Subsec. (g). Pub. L. 94–455, § 1604(k)(1), added subsec. (g). 1975—Subsec. (a)(4). Pub. L. 93–625, § 6(b), inserted ‘‘(other than foreclosure property, as defined in sub- section (e))’’ after ‘‘property’’. Subsec. (c)(2)(F), (3)(F). Pub. L. 93–625, § 6(d)(1), added subpar. (F) to pars. (2) and (3). Subsec. (e). Pub. L. 93–625, § 6(a), added subsec. (e). 1964—Subsec. (a)(6). Pub. L. 88–272 substituted ‘‘ad- justed ordinary gross income (as defined in section 543(b)(2))’’ for ‘‘gross income’’. Subsec. (d). Pub. L. 88–554 inserted reference to sub- paragraph (C) of section 318(a)(3) of this title. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2018 AMENDMENT Amendment by section 101(n) of Pub. L. 115–141 effec- tive as if included in the provision of the Protecting Americans from Tax Hikes Act of 2015, div. Q of Pub. L. 114–113, to which such amendment relates, see section 101(s) of Pub. L. 115–141, set out as a note under section 24 of this title. EFFECTIVE DATE OF 2015 AMENDMENT Amendment by section 311(b) of Pub. L. 114–113 appli- cable to distributions on or after December 7, 2015, ex- cept distributions pursuant to transactions described in ruling requests pending before the Internal Revenue Service as of such date, see section 311(c) of Pub. L. 114–113, set out as a note under section 355 of this title. Pub. L. 114–113, div. Q, title III, § 312(b), Dec. 18, 2015, 129 Stat. 3091, provided that: ‘‘The amendment made by this section [amending this section] shall apply to tax- able years beginning after December 31, 2017.’’ Pub. L. 114–113, div. Q, title III, § 317(c), Dec. 18, 2015, 129 Stat. 3094, provided that: ‘‘The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 2015.’’ Pub. L. 114–113, div. Q, title III, § 318(b), Dec. 18, 2015, 129 Stat. 3095, provided that: ‘‘The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 2015.’’ Pub. L. 114–113, div. Q, title III, § 319(c), Dec. 18, 2015, 129 Stat. 3096, provided that: ‘‘The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 2015.’’ Pub. L. 114–113, div. Q, title III, § 321(c), Dec. 18, 2015, 129 Stat. 3098, provided that: ‘‘The amendments made by this section [amending this section and section 857 of this title] shall apply to taxable years beginning after December 31, 2015.’’ EFFECTIVE DATES OF 2008 AMENDMENT Pub. L. 110–289, div. C, title II, § 3071, July 30, 2008, 122 Stat. 2902, provided that: ‘‘(a) IN GENERAL.—Except as otherwise provided in this section, the amendments made by this title [amending this section and section 857 of this title] shall apply to taxable years beginning after the date of the enactment of this Act [July 30, 2008]. ‘‘(b) REIT INCOME TESTS.— ‘‘(1) The amendments made by section 3031(a) and (c) [amending this section] shall apply to gains and items of income recognized after the date of the en- actment of this Act [July 30, 2008]. ‘‘(2) The amendment made by section 3031(b) [amending this section] shall apply to transactions entered into after the date of the enactment of this Act [July 30, 2008]. ‘‘(c) CONFORMING FOREIGN CURRENCY REVISIONS.— ‘‘(1) The amendment made by section 3033(a) [amending section 857 of this title] shall apply to gains recognized after the date of the enactment of this Act [July 30, 2008]. ‘‘(2) The amendment made by section 3033(b) [amending section 857 of this title] shall apply to gains and deductions recognized after the date of the enactment of this Act [July 30, 2008]. ‘‘(d) DEALER SALES.—The amendments made by sub- title C [subtitle C (§§ 3051, 3052) of title II of div. C of Pub. L. 110–289, amending section 857 of this title] shall apply to sales made after the date of the enactment of this Act [July 30, 2008].’’ Amendment of this section and repeal of Pub. L. 110–234 by Pub. L. 110–246 effective May 22, 2008, the date of enactment of Pub. L. 110–234, except as other- wise provided, see section 4 of Pub. L. 110–246, set out as an Effective Date note under section 8701 of Title 7, Agriculture. Pub. L. 110–234, title XV, § 15312(c), May 22, 2008, 122 Stat. 1504, and Pub. L. 110–246, § 4(a), title XV, § 15312(c), June 18, 2008, 122 Stat. 1664, 2266, provided that: ‘‘The amendments made by subsection (a) [amending this section] shall apply to dispositions in taxable years be- ginning after the date of the enactment of this Act [June 18, 2008].’’ [Pub. L. 110–234 and Pub. L. 110–246 enacted identical provisions. Pub. L. 110–234 was repealed by section 4(a) of Pub. L. 110–246, set out as a note under section 8701 of Title 7, Agriculture.] Pub. L. 110–234, title XV, § 15313(c), May 22, 2008, 122 Stat. 1504, and Pub. L. 110–246, § 4(a), title XV, § 15313(c), June 18, 2008, 122 Stat. 1664, 2266, provided that: ‘‘The amendments by this section [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [June 18, 2008].’’ [Pub. L. 110–234 and Pub. L. 110–246 enacted identical provisions. Pub. L. 110–234 was repealed by section 4(a) of Pub. L. 110–246, set out as a note under section 8701 of Title 7, Agriculture.] Pub. L. 110–234, title XV, § 15314(b), May 22, 2008, 122 Stat. 1504, and Pub. L. 110–246, § 4(a), title XV, § 15314(b), June 18, 2008, 122 Stat. 1664, 2266, provided that: ‘‘The amendment made by this section [amending this sec- tion] shall apply to taxable years beginning after the date of the enactment of this Act [June 18, 2008].’’ [Pub. L. 110–234 and Pub. L. 110–246 enacted identical provisions. Pub. L. 110–234 was repealed by section 4(a) of Pub. L. 110–246, set out as a note under section 8701 of Title 7, Agriculture.] EFFECTIVE DATE OF 2007 AMENDMENT Amendment by section 9(b) of Pub. L. 110–172 effec- tive as if included in the provision of the Tax Relief Ex- tension Act of 1999, Pub. L. 106–170, to which such amendment relates, see section 9(c) of Pub. L. 110–172, set out as a note under section 45 of this title. EFFECTIVE DATE OF 2005 AMENDMENT Amendments by section 403(d)(1), (2) of Pub. L. 109–135 effective as if included in the provisions of the Amer- ican Jobs Creation Act of 2004, Pub. L. 108–357, to which they relate, see section 403(nn) of Pub. L. 109–135, set out as a note under section 26 of this title. EFFECTIVE DATE OF 2004 AMENDMENT Pub. L. 108–357, title II, § 243(g), Oct. 22, 2004, 118 Stat. 1445, as amended by Pub. L. 109–135, title IV, § 403(d)(4), Dec. 21, 2005, 119 Stat. 2622, provided that: ‘‘(1) SUBSECTIONS (a) AND (b).—The amendments made by subsections (a) and (b) [amending this section] shall apply to taxable years beginning after December 31, 2000. ‘‘(2) SUBSECTIONS (c) AND (e).—The amendments made by subsections (c) and (e) [amending section 857 of this title] shall apply to taxable years beginning after the date of the enactment of this Act [Oct. 22, 2004]. ‘‘(3) SUBSECTION (d).—The amendment made by sub- section (d) [amending this section] shall apply to trans- actions entered into after December 31, 2004. ‘‘(4) SUBSECTION (f).— ‘‘(A) The amendment made by paragraph (1) of sub- section (f) [amending this section] shall apply to fail- ures with respect to which the requirements of sub- paragraph (A) or (B) of section 856(c)(7) of the Inter- nal Revenue Code of 1986 (as added by such para- graph) are satisfied after the date of the enactment of this Act [Oct. 22, 2004]. Page 1994 TITLE 26—INTERNAL REVENUE CODE § 856 ‘‘(B) The amendment made by paragraph (2) of sub- section (f) [amending this section] shall apply to fail- ures with respect to which the requirements of para- graph (6) of section 856(c) of the Internal Revenue Code of 1986 (as amended by such paragraph) are sat- isfied after the date of the enactment of this Act. ‘‘(C) The amendments made by paragraph (3) of sub- section (f) [amending this section] shall apply to fail- ures with respect to which the requirements of para- graph (5) of section 856(g) of the Internal Revenue Code of 1986 (as added by such paragraph) are satis- fied after the date of the enactment of this Act. ‘‘(D) The amendment made by paragraph (4) of sub- section (f) [amending section 857 of this title] shall apply to taxable years ending after the date of the en- actment of this Act. ‘‘(E) The amendments made by paragraph (5) of sub- section (f) [amending section 860 of this title] shall apply to statements filed after the date of the enact- ment of this Act.’’ Amendment by section 835(b)(4) of Pub. L. 108–357 ef- fective Jan. 1, 2005, with exception for any FASIT in ex- istence on Oct. 22, 2004, to the extent that regular inter- ests issued by the FASIT before such date continue to remain outstanding in accordance with the original terms of issuance, see section 835(c) of Pub. L. 108–357, set out as a note under section 56 of this title. EFFECTIVE DATE OF 1999 AMENDMENT Amendment by section 532(c)(2)(H)–(K) of Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title. Pub. L. 106–170, title V, § 542(b)(3)(A)(ii), Dec. 17, 1999, 113 Stat. 1943, provided that: ‘‘The amendment made by this subparagraph [amending this section] shall apply to taxable years beginning after December 31, 2000.’’ Pub. L. 106–170, title V, § 542(b)(3)(B)(ii), Dec. 17, 1999, 113 Stat. 1943, provided that: ‘‘The amendment made by this subparagraph [amending this section] shall apply to amounts received or accrued in taxable years begin- ning after December 31, 2000, except for amounts paid pursuant to leases in effect on July 12, 1999, or pursuant to a binding contract in effect on such date and at all times thereafter.’’ Pub. L. 106–170, title V, § 546, Dec. 17, 1999, 113 Stat. 1946, provided that: ‘‘(a) IN GENERAL.—The amendments made by this sub- part [subpart A (§§ 541–547) of part II of subtitle C of title V of Pub. L. 106–170, amending this section and sections 163 and 857 of this title] shall apply to taxable years beginning after December 31, 2000. ‘‘(b) TRANSITIONAL RULES RELATED TO SECTION 541.— ‘‘(1) EXISTING ARRANGEMENTS.— ‘‘(A) IN GENERAL.—Except as otherwise provided in this paragraph, the amendment made by section 541 [amending this section] shall not apply to a real estate investment trust with respect to— ‘‘(i) securities of a corporation held directly or indirectly by such trust on July 12, 1999; ‘‘(ii) securities of a corporation held by an enti- ty on July 12, 1999, if such trust acquires control of such entity pursuant to a written binding con- tract in effect on such date and at all times there- after before such acquisition; ‘‘(iii) securities received by such trust (or a suc- cessor) in exchange for, or with respect to, securi- ties described in clause (i) or (ii) in a transaction in which gain or loss is not recognized; and ‘‘(iv) securities acquired directly or indirectly by such trust as part of a reorganization (as de- fined in section 368(a)(1) of the Internal Revenue Code of 1986) with respect to such trust if such se- curities are described in clause (i), (ii), or (iii) with respect to any other real estate investment trust. ‘‘(B) NEW TRADE OR BUSINESS OR SUBSTANTIAL NEW ASSETS.—Subparagraph (A) shall cease to apply to securities of a corporation as of the first day after July 12, 1999, on which such corporation engages in a substantial new line of business, or acquires any substantial asset, other than— ‘‘(i) pursuant to a binding contract in effect on such date and at all times thereafter before the acquisition of such asset; ‘‘(ii) in a transaction in which gain or loss is not recognized by reason of section 1031 or 1033 of the Internal Revenue Code of 1986; or ‘‘(iii) in a reorganization (as so defined) with another corporation the securities of which are described in paragraph (1)(A) of this subsection. ‘‘(C) LIMITATION ON TRANSITION RULES.—Subpara- graph (A) shall cease to apply to securities of a cor- poration held, acquired, or received, directly or in- directly, by a real estate investment trust as of the first day after July 12, 1999, on which such trust ac- quires any additional securities of such corporation other than— ‘‘(i) pursuant to a binding contract in effect on July 12, 1999, and at all times thereafter; or ‘‘(ii) in a reorganization (as so defined) with an- other corporation the securities of which are de- scribed in paragraph (1)(A) of this subsection. ‘‘(2) TAX-FREE CONVERSION.—If— ‘‘(A) at the time of an election for a corporation to become a taxable REIT subsidiary, the amend- ment made by section 541 does not apply to such corporation by reason of paragraph (1); and ‘‘(B) such election first takes effect before Janu- ary 1, 2004, such election shall be treated as a reorganization qualifying under section 368(a)(1)(A) of such Code.’’ Pub. L. 106–170, title V, § 551(b), Dec. 17, 1999, 113 Stat. 1949, provided that: ‘‘The amendment made by this sec- tion [amending this section] shall apply to taxable years beginning after December 31, 2000.’’ Pub. L. 106–170, title V, § 561(b), Dec. 17, 1999, 113 Stat. 1950, provided that: ‘‘The amendment made by this sec- tion [amending this section] shall apply to taxable years beginning after December 31, 2000.’’ EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105–34 applicable to taxable years beginning after Aug. 5, 1997, see section 1263 of Pub. L. 105–34, set out as a note under section 852 of this title. EFFECTIVE DATE OF 1996 AMENDMENT Amendment by section 1621(b)(5) of Pub. L. 104–188 ef- fective Sept. 1, 1997, see section 1621(d) of Pub. L. 104–188, set out as a note under section 26 of this title. EFFECTIVE DATE OF 1993 AMENDMENT Pub. L. 103–66, title XIII, § 13149(b), Aug. 10, 1993, 107 Stat. 446, provided that: ‘‘The amendment made by this section [amending this section] shall apply to taxable years beginning after December 31, 1993.’’ EFFECTIVE DATE OF 1988 AMENDMENT Pub. L. 100–647, title I, § 1006(p)(2), Nov. 10, 1988, 102 Stat. 3416, provided that: ‘‘Notwithstanding section 669 of the Reform Act [Pub. L. 99–514, set out below], the amendment made by section 662(c) of the Reform Act [amending this section] shall apply to taxable years be- ginning after December 31, 1986, but only in the case of obligations acquired after October 22, 1986.’’ Pub. L. 100–647, title I, § 1006(p)(4)(B), Nov. 10, 1988, 102 Stat. 3417, provided that: ‘‘The amendment made by subparagraph (A) [amending this section] shall apply to taxable years ending after the date of the enactment of this Act [Nov. 10, 1988].’’ Amendment by section 1006(p)(1), (3), (5), (q), (t)(11) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment re- lates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. Page 1995 TITLE 26—INTERNAL REVENUE CODE § 856 EFFECTIVE DATE OF 1986 AMENDMENT Pub. L. 99–514, title VI, § 669, Oct. 22, 1986, 100 Stat. 2308, as amended by Pub. L. 100–647, title I, § 1018(u)(29), Nov. 10, 1988, 102 Stat. 3591, provided that: ‘‘(a) GENERAL RULE.—Except as otherwise provided in this section, the amendments made by this subtitle [subtitle G (§§ 661–668) of title VI of Pub. L. 99–514, amending this section and sections 857 to 860, 4981, and 6697 of this title] shall apply to taxable years beginning after December 31, 1986. ‘‘(b) SECTION 668.—The amendments made by section 668 [amending sections 857, 858, and 4981 of this title] shall apply to calendar years beginning after December 31, 1986. ‘‘(c) RETENTION OF EXISTING TRANSITIONAL RULE.— The amendment made by section 663(b)(2) [amending this section] shall not apply with respect to amounts received or accrued pursuant to loans made before May 28, 1976. For purposes of the preceding sentence, a loan is considered to be made before May 28, 1976, if such loan is made pursuant to a binding commitment en- tered into before May 28, 1976.’’ Amendment by section 671(b)(1) of Pub. L. 99–514 ef- fective Jan. 1, 1987, see section 675(a) of Pub. L. 99–514, as amended, set out as an Effective Date note under section 860A of this title. Amendment by section 901(d)(4)(E) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 901(e) of Pub. L. 99–514, set out as a note under section 166 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–369 applicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title. EFFECTIVE DATE OF 1978 AMENDMENT Pub. L. 95–600, title II, § 363(d), Nov. 6, 1978, 92 Stat. 2854, provided that: ‘‘The amendments made by sub- sections (a) [amending this section] and (b) [amending section 857 of this title] shall apply to taxable years ending after the date of the enactment of this Act [Nov. 6, 1978]. The amendment made by subsection (c) [amending this section] shall apply to extensions granted after the date of the enactment of this Act with respect to periods beginning after December 31, 1977.’’ Amendment by section 701(t)(2) of Pub. L. 95–600 ef- fective Oct. 4, 1976, see section 701(t)(5) of Pub. L. 95–600, set out as a note under section 859 of this title. EFFECTIVE DATE OF 1976 AMENDMENT Pub. L. 94–455, title XIV, § 1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years begin- ning in 1977. Pub. L. 94–455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years begin- ning after Dec. 31, 1977. Pub. L. 94–455, title XVI, § 1608(d), Oct. 4, 1976, 90 Stat. 1758, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘(1) Except as provided in paragraphs (2) and (3), the amendments made by sections 1603, 1604, and 1605 [en- acting sections 860 and 4981 of this title and amending this section and sections 275, 857, 858, 6161, 6211 to 6214, 6344, 6512, 6601, and 7422 of this title] shall apply to tax- able years of real estate investment trusts beginning after the date of the enactment of this Act [Oct. 4, 1976]. ‘‘(2) If, as a result of a determination (as defined in section 859(c) of the Internal Revenue Code of 1986 [for- merly I.R.C. 1954]), occurring after the date of enact- ment of this Act [Oct. 4, 1976], with respect to the real estate investment trust, such trust does not meet the requirement of section 856(a)(4) of the Internal Revenue Code of 1986 (as in effect before the amendment of such section by this Act) for any taxable year beginning on or before the date of the enactment of this Act, such trust may elect, within 60 days after such determina- tion in the manner provided in regulations prescribed by the Secretary of the Treasury or his delegate, to have the provisions of section 1603 (other than para- graphs (1), (2), (3), and (4) of section 1603(c)) apply with respect to such taxable year. Where the provisions of section 1603 apply to a real estate investment trust with respect to any taxable year beginning on or before the date of the enactment of this Act— ‘‘(A) credit or refund of any overpayment of tax which results from the application of section 1603 to such taxable year shall be made as if on the date of the determination (as defined in section 859(c) of the Internal Revenue Code of 1986) 2 years remained be- fore the expiration of the period of limitation pre- scribed by section 6511 of such Code on the filing of claim for refund for the taxable year to which the overpayment relates, ‘‘(B) the running of the statute of limitations pro- vided in section 6501 of such Code on the making of assessments, and the bringing of distraint or a pro- ceeding in court for collection, in respect of any defi- ciency (as defined in section 6211 of such Code) estab- lished by such a determination, and all interest, addi- tions to tax, additional amounts, or assessable pen- alties in respect thereof, shall be suspended for a pe- riod of 2 years after the date of such determination, and ‘‘(C) the collection of any deficiency (as defined in section 6211 of such Code) established by such deter- mination and all interest, additions to tax, additional amounts, and assessable penalties in respect thereof shall, except in cases of jeopardy, be stayed until the expiration of 60 days after the date of such deter- mination. No distraint or proceeding in court shall be begun for the collection of an amount the collection of which is stayed under subparagraph (C) during the period for which the collection of such amount is stayed. ‘‘(3) Section 856(g)(3) of the Internal Revenue Code of 1986, as added by section 1604 of this Act, shall not apply with respect to a termination of an election, filed by a taxpayer under section 856(c)(1) of such Code on or before the date of the enactment of this Act [Oct. 4, 1976], unless the provisions of part II of subchapter M of chapter 1 of subtitle A of such Code apply to such tax- payer for a taxable year ending after the date of the en- actment of this Act for which such election is in ef- fect.’’ EFFECTIVE DATE OF 1975 AMENDMENT Pub. L. 93–625, § 6(e), Jan. 3, 1975, 88 Stat. 2114, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘The amendments made by this section [amending this section and section 857 of this title] apply to foreclosure property acquired after De- cember 31, 1973. Notwithstanding the provisions of sec- tion 856(e)(5) of the Internal Revenue Code of 1986 [for- merly I.R.C. 1954] (as added by subsection (a) of this section) any taxpayer required to make an election with respect to foreclosure property sooner than 90 days after the date of enactment of this Act [Jan. 3, 1975], may make that election at any time before the 91st day after the date of enactment of this Act.’’ EFFECTIVE DATE OF 1964 AMENDMENTS Amendment by Pub. L. 88–554 effective Aug. 31, 1964, except that for purposes of sections 302 and 304 of this title, such amendments shall not apply to distributions in payment for stock acquisitions or redemptions, if such acquisitions or redemptions occurred before Aug. 31, 1964, see section 4(c) of Pub. L. 88–554, set out as a note under section 318 of this title. Amendment by Pub. L. 88–272 applicable to taxable years beginning after Dec. 31, 1963, see section 225(l) of Pub. L. 88–272, set out as a note under section 316 of this title. Page 1996 TITLE 26—INTERNAL REVENUE CODE § 857 EFFECTIVE DATE Pub. L. 86–779, § 10(k), Sept. 14, 1960, 74 Stat. 1009, pro- vided that: ‘‘The amendments made by this section [en- acting this section and sections 857 and 858 and amend- ing sections 11, 34, 116, 243, 318, 443, 852, 855, and 1504 of this title] shall apply with respect to taxable years of real estate investment trusts beginning after December 31, 1960.’’ SAVINGS PROVISION For provisions that nothing in amendment by section 401(b)(28) of Pub. L. 115–141 be construed to affect treat- ment of certain transactions occurring, property ac- quired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining liability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 of this title. STUDY RELATING TO TAXABLE REIT SUBSIDIARIES Pub. L. 106–170, title V, § 547, Dec. 17, 1999, 113 Stat. 1947, provided that: ‘‘The Secretary of the Treasury shall conduct a study to determine how many taxable REIT subsidiaries are in existence and the aggregate amount of taxes paid by such subsidiaries. The Sec- retary shall submit a report to the Congress describing the results of such study.’’ TRUST NOT DISQUALIFIED IN CERTAIN CASES WHERE INCOME TESTS NOT MET Pub. L. 94–455, title XVI, § 1608(b), Oct. 4, 1976, 90 Stat. 1757, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘The amendment made by section 1602 [amending this section and section 857 of this title] shall apply to taxable years of real estate in- vestment trusts beginning after the date of the enact- ment of this Act [Oct. 4, 1976]. In addition, the amend- ments made by section 1602 shall apply to a taxable year of a real estate investment trust beginning before the date of the enactment of this Act if, as the result of a determination (as defined in section 859(c) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) with respect to such trust occurring after the date of the enactment of this Act, such trust for such taxable years does not meet the requirements of section 856(c)(2) or section 856(c)(3), or of both such sections, of such Code as in effect for such taxable year. In any case, the amendment made by section 1602(a) requiring a schedule to be attached to the income tax return of certain real estate investment trusts shall apply only to taxable years of such trusts beginning after the date of the enactment of this Act. If the amendments made by section 1602 apply to a taxable year ending on or be- fore the date of enactment of this Act, the reference to paragraph (2)(B) in section 857(b)(5) of such Code, as amended, shall be considered to be a reference to para- graph (2)(C) of section 857(b) of such Code, as in effect immediately before the enactment of this Act.’’ § 857. Taxation of real estate investment trusts and their beneficiaries (a) Requirements applicable to real estate invest- ment trusts The provisions of this part (other than sub- section (d) of this section and subsection (g) of section 856) shall not apply to a real estate in- vestment trust for a taxable year unless— (1) the deduction for dividends paid during the taxable year (as defined in section 561, but determined without regard to capital gains dividends) equals or exceeds— (A) the sum of— (i) 90 percent of the real estate invest- ment trust taxable income for the taxable year (determined without regard to the de- duction for dividends paid (as defined in section 561) and by excluding any net cap- ital gain); and (ii) 90 percent of the excess of the net in- come from foreclosure property over the tax imposed on such income by subsection (b)(4)(A); minus (B) any excess noncash income (as deter- mined under subsection (e)); and (2) either— (A) the provisions of this part apply to the real estate investment trust for all taxable years beginning after February 28, 1986, or (B) as of the close of the taxable year, the real estate investment trust has no earnings and profits accumulated in any non-REIT year. For purposes of the preceding sentence, the term ‘‘non-REIT year’’ means any taxable year to which the provisions of this part did not apply with respect to the entity. The Secretary may waive the requirements of paragraph (1) for any taxable year if the real estate investment trust establishes to the satisfaction of the Secretary that it was unable to meet such requirements by reason of distributions previously made to meet the requirements of section 4981. (b) Method of taxation of real estate investment trusts and holders of shares or certificates of beneficial interest (1) Imposition of tax on real estate investment trusts There is hereby imposed for each taxable year on the real estate investment trust tax- able 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 re- ferred to in section 11. (2) Real estate investment trust taxable income For purposes of this part, the term ‘‘real es- tate investment trust taxable income’’ means the taxable income of the real estate invest- ment trust, adjusted as follows: (A) The deductions for corporations pro- vided in part VIII (except section 248) of sub- chapter B (section 241 and following, relat- ing 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 attrib- utable to the amount excluded under sub- paragraph (D). (C) The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on change of annual ac- counting 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 tax- able year. (F) There shall be excluded an amount equal to any net income derived from pro- hibited transactions.