I
110th CONGRESS
1st Session
H. R. 1147
IN THE HOUSE OF REPRESENTATIVES
February 16, 2007
Mr. Crowley (for himself, Mr. Cantor, Mr. Pomeroy, and Mr. Reynolds) introduced the following bill; which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to simplify certain provisions applicable to real estate investment trusts, and for other purposes.
Short title
This Act may be cited as the
REIT Investment Diversification and
Empowerment Act of 2007
.
Amendment of 1986 Code
Except as otherwise expressly provided, whenever in the Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.
Foreign currency and other qualified activities
Revisions to REIT income tests
Addition of permissible income categories
Section 856(c) (relating to limitations) is amended—
by striking and
at the end
of paragraph (2)(G) and by inserting after paragraph (2)(H) the following new
subparagraphs:
passive foreign exchange gains; and
any other item of income or gain as determined by the Secretary;
, and
by striking and
at the end
of paragraphs (3)(H) and (3)(I) and by inserting after paragraph (3)(I) the
following new subparagraphs:
real estate foreign exchange gains; and
any other item of income or gain as determined by the Secretary; and
.
Rules regarding foreign currency transactions
Section 856 (defining real estate investment trust) is amended by adding at the end the following new subsection:
Rules regarding foreign currency transactions
With respect to any taxable year—
Real estate foreign exchange gains
For purposes of subsection (c)(3)(J), the term real estate foreign exchange gains means—
foreign currency gains (as defined in section 988(b)(1)) which are attributable to—
any item described in subsection (c)(3) (other than in subparagraph (J) thereof),
the acquisition or ownership of obligations secured by mortgages on real property or on interests in real property (other than foreign currency gains attributable to any item described in clause (i)), or
becoming or being the obligor under obligations secured by mortgages on real property or on interests in real property (other than foreign currency gains attributable to any item described in clause (i)),
gains described in section 987 attributable to a qualified business unit (as defined by section 989) of the real estate investment trust, but only if such qualified business unit meets the requirements under—
subsection (c)(3) (without regard to subparagraph (J) thereof) for the taxable year, and
subsection (c)(4)(A) at the close of each quarter that the real estate investment trust has directly or indirectly held the qualified business unit, and
any other foreign currency gains as determined by the Secretary.
Passive foreign exchange gains
For purposes of subsection (c)(2)(I), the term passive foreign exchange gains means—
real estate foreign exchange gains,
foreign currency gains (as defined in section 988(b)(1)) which are not described in subparagraph (A) and which are attributable to any item described in subsection (c)(2) (other than in subparagraph (I) thereof), and
any other foreign currency gains as determined by the Secretary.
.
Addition to REIT hedging rule
Subparagraph (G) of section 856(c)(5) is amended to read as follows:
Treatment of certain hedging instruments
Except to the extent as determined by the Secretary—
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 pursuant to section 1221(a)(7), including gain from the sale or disposition of such a transaction, shall not constitute gross income under paragraphs (2) and (3) to the extent that the transaction hedges any indebtedness incurred or to be incurred by the trust to acquire or carry real estate assets, and
any income of a real estate investment trust from a transaction entered into by the trust primarily to manage risk of currency fluctuations with respect to any item described in paragraph (2) or (3), including gain from the termination of such a transaction, shall not constitute gross income under paragraphs (2) and (3), 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).
.
Authority to exclude items of income from REIT income tests
Section 856(c)(5) is amended by adding at the end the following new subparagraph:
Secretarial authority to exclude other items of income
The Secretary is authorized to determine whether any item of income or gain which does not otherwise qualify under paragraph (2) or (3) may be considered as not constituting gross income solely for purposes of this part.
.
Revisions to REIT asset tests
Clarification of valuation test
The first
sentence in the matter following section 856(c)(4)(B)(iii)(III) is amended by
inserting (including a discrepancy caused solely by the change in the
foreign currency exchange rate used to value a foreign asset)
after
such requirements
.
Clarification of permissible asset category
Section 856(c)(5), as amended by section 101(d), is amended by adding at the end the following new subparagraph:
Cash
The term cash includes foreign currency if the real estate investment trust or its qualified business unit (as defined in section 989) uses such foreign currency as its functional currency (as defined in section 985(b)).
.
Conforming foreign currency revisions
Net income from foreclosure property
Clause (i) of section 857(b)(4)(B) is amended to read as follows:
gain (including any foreign currency gain, as defined in section 988(b)(1)) from the sale or other disposition of foreclosure property described in section 1221(a)(1) and the gross income for the taxable year derived from foreclosure property (as defined in section 856(e)), but only to the extent such gross income is not described in (or, in the case of foreign currency gain, not attributable to gross income described in) section 856(c)(3) other than subparagraph (F) thereof, over
.
Net income from prohibited transactions
Clause (i) of section 857(b)(6)(B) is amended to read as follows:
the term net income derived from prohibited transactions means the excess of the gain (including any foreign currency gain, as defined in section 988(b)(1)) from prohibited transactions over the deductions (including any foreign currency loss, as defined in section 988(b)(2)) allowed by this chapter which are directly connected with prohibited transactions;
.
Taxable reit subsidiaries
Conforming taxable REIT subsidiary asset test
Section 856(c)(4)(B)(ii) is amended by
striking 20 percent
and inserting 25
percent
.
Dealer sales
Holding period under safe harbor
Section 857(b)(6) (relating to income from prohibited transactions) is amended—
by striking 4 years
in
subparagraphs (C)(i), (C)(iv), and (D)(i) and inserting 2
years
,
by striking 4-year period
in
subparagraphs (C)(ii), (D)(ii), and (D)(iii) and inserting 2-year
period
, and
by striking real estate
asset
and all that follows through if
in the matter
preceding clause (i) of subparagraphs (C) and (D), respectively, and inserting
real estate asset (as defined in section 856(c)(5)(B)) and which is
described in section 1221(a)(1) if
.
Determining value of sales under safe harbor
Subparagraphs (C)(iii)(II) and (D)(iv)(II)
of section 857(b)(6) are each amended by striking the aggregate adjusted
bases
and all that follows through the beginning of the taxable
year
and inserting the fair market value of property (other than
sales of foreclosure property or sales to which section 1033 applies) sold
during the taxable year does not exceed 10 percent of the fair market value of
all of the assets of the trust as of the beginning of the taxable
year
.
Health care reits
Conformity for health care facilities
Related party rentals
Subparagraph (B) of section 856(d)(8) (relating to special rule for taxable REIT subsidiaries) is amended to read as follows:
Exception for certain lodging facilities and health care property
The requirements of this subparagraph are met with respect to an interest in real property which is a qualified lodging facility or a qualified health care property (as defined in subsection (e)(6)(D)(i)) 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. For purposes of this section, a taxable REIT subsidiary is not considered to be operating or managing a qualified health care property or qualified lodging facility solely because it directly or indirectly possesses a license, permit or similar instrument enabling it to do so.
.
Eligible independent contractor
Subparagraphs (A) and (B) of section 856(d)(9) (relating to eligible independent contractor) are amended to read as follows:
In general
The term eligible independent contractor means, with respect to any qualified 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 subsidiary to operate such qualified lodging facility or qualified health care property, such contractor (or any related person) is actively engaged in the trade or business of operating qualified lodging facilities or qualified 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.
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:
The taxable REIT subsidiary bears the expenses for the operation of such qualified lodging facility or qualified health care property pursuant to the management agreement or other similar service contract.
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 operator pursuant to such agreement or contract.
The real estate investment trust receives income from such person with respect to another property that is attributable to a lease of such other property to such person that was in effect as of the later of—
January 1, 1999, or
the earliest date that any taxable REIT subsidiary of such trust entered into a management agreement or other similar service contract with such person with respect to such qualified lodging facility or qualified health care property.
.
Taxable reit subsidiaries
The last sentence of section 856(l)(3) is amended—
by
inserting or a health care facility
after a lodging
facility
, and
by inserting
or health care facility
after such lodging
facility
.
Foreign reits
Stock of foreign REITs as real estate assets
In general
The first sentence in
section 856(c)(5)(B) is amended by inserting or in a qualified foreign
REIT
after this part
.
Qualified foreign REIT
Section 856(c) is amended by adding at the end the following new paragraph:
Qualified foreign REIT
For purposes of this subsection, the term qualified foreign REIT means a corporation, trust, or association—
treated as a corporation under section 7701(a)(3),
the shares or certificates of beneficial interests of which are regularly traded on an established securities market, and
which is organized in a country under rules that the Secretary determines meet the following criteria:
At least 75 percent of the entity's assets must qualify as real estate assets (determined without regard to shares or transferable certificates of beneficial interest in such entity), as determined at the close of the entity's prior taxable year.
The entity either receives a dividends paid deduction comparable to section 561 or is exempt from corporate level tax.
The entity is required to distribute at least 85 percent of its annual taxable income (as computed in the jurisdiction in which it is organized) to the holders of its shares or certificates of beneficial interest on an annual basis.
.
Dividends from foreign REITs
Section
856(c)(3)(D) is amended by inserting and in qualified foreign
REITs
after this part
.
Effective dates
Effective dates
In general
Except as otherwise provided in this section, the amendments made by this Act shall apply to taxable years beginning after the date of the enactment of this Act.
REIT income tests
The amendment made by section 101(a) and (b) shall apply to gains and items of income recognized after the date of the enactment of this Act.
The amendment made by section 101(c) shall apply to transactions entered into after the date of the enactment of this Act.
The amendment made by section 101(d) shall apply after the date of the enactment of this Act.
Conforming foreign currency revisions
The amendment made by section 103(a) shall apply to gains recognized after the date of the enactment of this Act.
The amendment made by section 103(b) shall apply to gains and deductions recognized after the date of the enactment of this Act.
Dealer sales
The amendments made by Title III shall apply to sales made after the date of the enactment of this Act.