7993 / How are the assets and income of a REIT classified if the REIT owns interests in a partnership?

A REIT may own interests in a partnership and participate in that partnership as a partner much in the same way as any other taxpayer-entity. For purposes of the asset and income tests applicable to REITs, the REIT will be deemed to own its proportionate share of each of the underlying partnership assets. The characterization given to any partnership asset for partnership purposes is controlling in determining the character of the asset for purposes of applying the REIT asset tests (see Q 7990 to Q 7992).¹

Under the regulations, the REIT’s proportionate interest in a partnership is determined based upon its capital interest in the partnership. The IRS has found that, because a partner’s capital account typically reflects its net investment in the partnership, a REIT’s capital interest in a partnership is determined by dividing the REIT’s capital account balance by the sum of all of the partners’ capital account balances.²

For purposes of the income tests applicable to REITs, any income realized when a REIT-partner sells its interest in the partnership will be attributable to real property to the extent that the underlying assets of the partnership constitute real property.³

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1.  Treas. Reg. § 1.856-3(g).

2.  See Let. Rul. 200310014.