The IRS released private letter ruling (PLR) 202440007 on Oct. 4, ruling that a REIT that produced no income and had no assets during its first year was not precluded from being a REIT. Amongst other reasons, the IRS cited basic mathematics, noting with respect to the income tests and asset tests that “95% of $0 equals $0” and “75% of $0 equals $0”, respectively. This is a fact pattern that arises more frequently than one would expect. One common example is when the intended REIT entity is formed in anticipation of the closing for the initial portfolio acquisition and, for reasons unanticipated, the closing slips to the following year. In Taft’s experience, most REITs took the position of qualifying as a REIT in the year of formation and took care to comply with the 100-shareholder requirement and closely held testing for the taxable year in which the closing occurred — which can approach quickly when forming the REIT late in the calendar year. The PLR provides certainty in how to proceed in these scenarios.¹ Moreover, the ruling serves as a continuation of the longer-term trend in REITs.

¹ Private letter rulings, while binding only on the taxpayer requesting the ruling, are indicative of the IRS’ thinking with respect to the issue more generally.