I
112th CONGRESS
2d Session
H. R. 5746
IN THE HOUSE OF REPRESENTATIVES
May 15, 2012
Mr. Tiberi (for himself, Mr. Neal, Mr. Sam Johnson of Texas, Mr. Rangel, Mr. Nunes, Mr. Stark, Mr. Reichert, Mr. Lewis of Georgia, Mr. Roskam, Mr. Blumenauer, Mr. Gerlach, Mr. Kind, Mr. Schock, Mr. Crowley, Ms. Jenkins, and Mr. Paulsen) 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 modify certain rules applicable to real estate investment trusts, and for other purposes.
Short title; etc
Short title
This Act may be cited
as the Update and Streamline REIT Act
of 2012
or the US REIT Act of 2012
.
Amendment of 1986 Code
Except as otherwise expressly provided, whenever in this 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.
Table of contents
The table of contents for this Act is as follows:
Sec. 1. Short title; etc.
Title I—Update of prohibited transaction and related provisions
Sec. 101. Prohibited transaction safe harbors.
Sec. 102. Treatment of taxable REIT subsidiaries.
Title II—Preferential and designated dividends
Sec. 201. Repeal of preferential dividend rule for publicly offered REITs.
Sec. 202. Authority for alternative remedies to address certain failures.
Sec. 203. Treatment of interest-related dividends of specified REITs.
Sec. 204. Limitations on designation of dividends.
Title III—Update and Modification of REIT Income and Asset Tests
Sec. 301. Debt instruments of publicly offered REITs and mortgages treated as real estate assets.
Sec. 302. Asset and income test clarification regarding ancillary personal property.
Sec. 303. Special rules for treatment of timber gains made permanent.
Sec. 304. Treatment of mineral royalty income as qualifying income.
Sec. 305. Hedging provisions.
Title IV—Earnings and Profits of Real Estate Investment Trusts
Sec. 401. Modification of real estate investment trust earnings and profits calculation to avoid duplicate taxation.
Update of prohibited transaction and related provisions
Prohibited transaction safe harbors
Alternative 3-Year averaging test for percentage of assets that can be sold annually
In general
Clause (iii) of section 857(b)(6)C) is amended by
inserting before the semicolon at the end the following: , or (IV) the
trust satisfies the requirements of subclause (II) applied by substituting
.20 percent
for 10 percent
and the 3-year average
adjusted bases percentage for the taxable year (as defined in subparagraph (G))
does not exceed 10 percent, or (V) the trust satisfies the requirements of
subclause (III) applied by substituting 20 percent
for 10
percent
and the 3-year average fair market value percentage for the
taxable year (as defined in subparagraph (H)) does not exceed 10
percent
3-year average adjusted bases and fair market value percentages
Paragraph (6) of section 857(b) is amended by redesignating subparagraphs (G) and (H) as subparagraphs (I) and (J), respectively, and by inserting after subparagraph (F) the following new subparagraphs:
3-year average adjusted bases percentage
The
term 3-year average adjusted bases percentage
means, with
respect to any taxable year, the ratio (expressed as a percentage) of—
the aggregate adjusted bases (as determined for purposes of computing earnings and profits) of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the 3 taxable year period ending with such taxable year, divided by
the sum of the aggregate adjusted bases (as so determined) of all of the assets of the trust as of the beginning of each of the 3 taxable years which are part of the period referred to in clause (i).
3-year average fair market value percentage
The term 3-year average fair market
value percentage
means, with respect to any taxable year, the ratio
(expressed as a percentage) of—
the fair market value of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the 3 taxable year period ending with such taxable year, divided by
the sum of the fair market value of all of the assets of the trust as of the beginning of each of the 3 taxable years which are part of the period referred to in clause (i).
.
Conforming amendments
Clause (iv) of section 857(b)(6)(D) is amended by
adding or
at the end of subclause (III) and by adding at the end
the following new subclauses:
the trust satisfies the requirements of
subclause (II) applied by substituting 20 percent
for 10
percent
and the 3-year average adjusted bases percentage for the
taxable year (as defined in subparagraph (G)) does not exceed 10 percent,
or
the trust
satisfies the requirements of subclause (III) applied by substituting 20
percent
for 10 percent
and the 3-year average fair
market value percentage for the taxable year (as defined in subparagraph (H))
does not exceed 10
percent,
.
Application of safe harbors independent of determination whether real estate asset is inventory property
In general
Subparagraphs (C) and (D) of section 857(b)(6) are each
amended by striking and which is described in section 1221(a)(1)
in the matter preceding clause (i).
No inference from safe harbors
Subparagraph (F) of section 857(b)(6) is amended to read as follows:
No inference with respect to treatment as inventory property
The determination of whether property is described in section 1221(a)(1) shall be made without regard to this paragraph.
.
Effective dates
In general
The amendments made by subsection (a) shall apply to taxable years beginning after the date of the enactment of this Act.
Application of safe harbors
In general
Except as provided in subparagraph (B), the amendments made by subsection (b) shall take effect as if included in section 3051 of the Housing Assistance Tax Act of 2008.
Retroactive application of no inference not applicable to certain timber property previously treated as not inventory property
The amendment made by subsection (b)(2) shall not apply to any sale of property to which section 857(b)(6)(G) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of this Act) applies.
Treatment of taxable REIT subsidiaries
Taxable REIT subsidiaries treated in same manner as independent contractors for certain purposes
Marketing and development expenses under rental property safe harbor
Clause (v) of section 857(b)(6)(C) is
amended by inserting or by a taxable REIT subsidiary
before the
period at the end.
Rule for marketing expenses under timber property safe harbor reinstated and made permanent
Clause (v) of section 857(b)(6)(D) is amended by
striking , or, in the case of a sale on or before the termination
date,
and inserting or by
.
Foreclosure property grace period
Subparagraph (C) of section 856(e)(4) is
amended by inserting or through a taxable REIT subsidiary
after
receive any income
.
Tax on redetermined TRS service income
In general
Subparagraph (A) of section 857(b)(7) is amended by
striking and excess interest
and inserting excess
interest, and redetermined TRS service income
.
Redetermined TRS service income
Paragraph (7) of section 857(b) is amended by redesignating subparagraphs (E) and (F) as subparagraphs (F) and (G), respectively, and inserting after subparagraph (D) the following new subparagraph:
Redetermined TRS service income
In general
The term redetermined TRS service income
means gross income of a taxable REIT subsidiary of a real estate investment
trust attributable to services provided to, or on behalf of, such trust (less
deductions properly allocable thereto) to the extent the amount of such income
(less such deductions) would (but for subparagraph (F)) be increased on
distribution, apportionment, or allocation under section 482.
Coordination with redetermined rents
Clause (i) shall not apply with respect to gross income attributable to services furnished or rendered to a tenant of the real estate investment trust (or to deductions properly allocable thereto).
.
Conforming amendments
Subparagraphs (B)(i) and (C) of section 857(b)(7) are
each amended by striking subparagraph (E)
and inserting
subparagraph (F)
.
Effective date
The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.
Preferential and designated dividends
Repeal of preferential dividend rule for publicly offered REITs
In general
Subsection (c) of section 562 is amended by inserting
or a publicly offered REIT (as defined in section 856(c)(5)(K))
after a publicly offered regulated investment company (as defined in
section 67(c)(2)(B))
.
Effective date
The amendment made by this section shall apply to distributions in taxable years beginning after the date of the enactment of this Act.
Authority for alternative remedies to address certain failures
In general
Subsection (e) of section 562 is amended—
by striking
In the case of a real estate investment trust
and inserting the
following:
Determination of earnings and profits for purposes of dividends paid deduction
In the case of a real estate investment trust
, and
by adding at the end the following new paragraph:
Authority to provide alternative remedies for certain failures
In the case of a failure of a distribution by a real estate investment trust to comply with the requirements of subsection (c), the Secretary may provide an appropriate remedy to cure such failure in lieu of not considering the distribution to be a dividend for purposes of computing the dividends paid deduction if—
the Secretary determines that such failure is inadvertent or is due to reasonable cause and not due to willful neglect, or
such failure is of a type of failure which the Secretary has identified for purposes of this paragraph as being described in subparagraph (A).
.
Effective date
The amendments made by this section shall apply to distributions in taxable years beginning after the date of the enactment of this Act.
Treatment of interest-related dividends of specified REITs
Nonresident alien individuals
In general
Section 871 is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following new subsection:
Interest-Related dividends of specified REITs
In general
Except as provided in paragraph (2), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any interest-related dividend received from a specified REIT.
Exceptions
Paragraph (1) shall not apply to any dividend described in subsection (k)(1)(B) (determined by treating the specified REIT as a regulated investment company).
Interest-related dividend
For purposes of this subsection—
In general
The term interest-related dividend
means
any dividend (or part thereof) which is designated by the specified REIT as an
interest-related dividend in a written notice mailed to its shareholders or
holders of beneficial interests before the expiration of 60 days after the
close of its taxable year.
Excess reported amount
If the aggregate amount so designated with respect to a taxable year of the trust (including amounts so designated with respect to dividends paid after the close of the taxable year described in section 858) is greater than the qualified net interest income of the trust for such taxable year, the portion of each distribution which shall be an interest-related dividend shall be only that portion of the amounts so designated which such qualified net interest income bears to the aggregate amount so designated.
Qualified net interest income
The term qualified net interest
income
has the meaning given such term by subsection (k)(1)(D)
(determined by treating the specified REIT as a regulated investment
company).
Termination
The
term interest-related dividend
shall not include any dividend
with respect to any taxable year of the trust beginning after the date set
forth in clause (v) of subsection (k)(1)(C).
Specified REIT
For purposes of this
subsection, the term specified REIT
means any publicly offered
REIT (as defined in section 856(c)(5)(K)) other than any real estate investment
trust with respect to which any foreign person owns (within the meaning of
section 856(d)(5)) 50 percent or more (determined by vote or value) of the
shares, or certificates of beneficial interest, in such
trust.
.
Conforming amendment
Clause (iv) of section 871(k)(1)(E) is amended by
striking another regulated investment company
and inserting
a regulated investment company or a specified REIT (as defined in
subsection (n)(4))
.
Foreign corporations
Section 881 is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:
Tax not To apply to interest-Related dividends of specified REITs
In general
Except as provided in paragraph (2), no tax shall be imposed under paragraph (1) of subsection (a) on any interest-related dividend (as defined in section 871(n)(3)) received from a specified REIT (as defined in section 871(n)(4)).
Exceptions and special rules
Rules similar to the rules of subparagraphs (B) and (C) of subsection (e)(1) shall apply for purposes of this subsection (determined by treating the specified REIT as a regulated investment company).
.
Withholding
Nonresident aliens
Paragraph (12) of section 1441(c) is amended—
by striking
section 871(k)
in subparagraph (A) and inserting
subsection (k) or (n) of section 871
,
by inserting
or real estate investment trust (as the case may be)
after
regulated investment company
in subparagraph (B), and
by striking
regulated investment
companies
in the heading thereof and inserting
regulated investment
companies and real estate investment trusts
.
Foreign corporations
Subsection (a) of section 1442 is amended—
by striking
sections 871(a) and 871(k)
and inserting subsections (a),
(k), and (n) of section 871
,
by striking
sections 881(a) and 881(e)
and inserting subsections (a),
(e), and (f) of section 881
, and
by inserting
or real estate investment trust (as the case may be)
after
regulated investment company
.
Effective date
In general
The amendments made by this section shall apply to distributions made after the date of the enactment of this Act.
Transition rule
In the case of a taxable year which includes the date of the enactment of this Act, qualified net interest income (as defined in section 871(n)(3)(C) of the Internal Revenue Code of 1986, as added by this section) shall be determined by taking into account only items properly includible in gross income for the portion of such taxable year after such date (and deductions properly allocable to such income).
Limitations on designation of dividends
In general
Section 857 is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection:
Limitations on designation of dividends
Overall limitation
The aggregate amount of dividends designated by a real estate investment trust under section 857(b)(3)(C), section 857(c)(2)(A), and section 871(n)(3) with respect to any taxable year may not exceed the dividends paid by such trust with respect to such year. For purposes of the preceding sentence, dividends paid after the close of the taxable year described in section 858 shall be treated as paid with respect to such year.
Proportionality
The Secretary may prescribe regulations or other guidance requiring the proportionality of the designation of particular types of dividends among shares or beneficial interests of a real estate investment trust.
.
Effective date
The amendments made by this section shall apply to distributions in taxable years beginning after the date of the enactment of this Act.
Update and Modification of REIT Income and Asset Tests
Debt instruments of publicly offered REITs and mortgages treated as real estate assets
Debt instruments of publicly offered REITs treated as real estate assets
In general
Subparagraph (B) of section 856(c)(5) is amended—
by striking
and shares
and inserting , shares
, and
by inserting
, and debt instruments issued by publicly offered REITs
before
the period at the end of the first sentence.
Income from nonqualified debt instruments of publicly offered REITs not qualified for purposes of satisfying the 75 percent gross income test
Subparagraph (H) of section 856(c)(3) is
amended by inserting (other than a nonqualified publicly offered REIT
debt instrument)
after real estate asset
.
25 percent asset limitation on holding of nonqualified debt instruments of publicly offered REITs
Subparagraph (B) of section 856(c)(4) is amended by redesignating clause (iii) as clause (iv) and by inserting after clause (ii) the following new clause:
not more than 25 percent of the value of its total assets is represented by nonqualified publicly offered REIT debt instruments, and
.
Definitions related to debt instruments of publicly offered REITs
Paragraph (5) of section 856(c) is amended by adding at the end the following new subparagraph:
Definitions related to debt instruments of publicly offered REITs
Publicly offered REIT
The term publicly offered REIT
means any real
estate investment trust which meets the requirements of this part and which is
required to file annual and periodic reports with the Securities and Exchange
Commission under the Securities Exchange Act of 1934.
Nonqualified publicly offered REIT debt instrument
The term
nonqualified publicly offered REIT debt instrument
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 instruments
issued by publicly offered
REITs
.
.
Interests in mortgages on interests in real property treated as real estate assets
Subparagraph (B) of section 856(c)(5) is amended by
inserting or on interests in real property
after
interests in mortgages on real property
.
Effective date
The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.
Asset and income test clarification regarding ancillary personal property
In general
Subsection (c) of section 856 is amended by adding at the end the following new paragraph:
Special rules for certain personal property which is ancillary to real property
Certain personal property leased in connection with real property
Personal property shall be treated as a real estate asset for purposes 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).
Certain personal property mortgaged in connection with real property
In the case of an obligation 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 personal property shall be treated as real property for purposes of applying paragraphs (3)(B) and (4)(A). For purposes of the preceding sentence, the fair market value of all such property shall be determined in the same manner as the fair market value of real property is determined for purposes of apportioning interest income between real property and personal property under paragraph (3)(B).
.
Effective date
The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.
Special rules for treatment of timber gains made permanent
In general
Subparagraph (H) of section 856(c)(5) is amended by striking clause (iii).
Clarification of exemption from prohibited transaction rules
Subclause (II) of section 856(c)(5)(H)(ii) is amended to read as follows:
Exemption from prohibited transaction rules
For purposes of this part, income described in this subparagraph shall not be treated as gain from a prohibited transaction.
.
Conforming amendments
Subclause (I) of section 856(c)(5)(H)(ii)
is amended by inserting Deemed sale of cut timber.—
before
For purposes of
.
Subsection (c) of section 856, as amended by section 302, is amended by striking paragraph (8) and redesignating paragraph (9) as paragraph (8).
Paragraph (6) of section 857(b), as amended by section 101(a), is amended by striking subparagraphs (I) and (J).
Effective date
The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.
Treatment of mineral royalty income as qualifying income
In general
Subparagraph (I) of section 856(c)(2) is amended to read as follows:
mineral royalty income (including oil and gas royalties) from real property owned by a real estate investment trust and held, or once held, in connection with the trust’s trade or business of generating rents from real property or producing timber;
.
Conforming amendment
Paragraph (5) of section 856(c), as amended by section 301, is amended by striking subparagraph (I) and by redesignating subparagraphs (J), (K), and (L) as subparagraphs (I), (J), and (K), respectively.
Effective date
The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.
Hedging provisions
Modification To permit the termination of a hedging transaction using an additional hedging instrument
Subparagraph (G)
of section 856(c)(5) is amended by striking and
at the end of
clause (i), by striking the period at the end of clause (ii) and inserting
, and
, and by adding at the end the following new clause:
if—
a real estate investment trust enters into one or more positions described in clause (i) with respect to indebtedness described in clause (i) or one or more positions described in clause (ii) with respect to property which generates income or gain described in paragraph (2) or (3),
any portion of such indebtedness is extinguished or any portion of such property is disposed of, and
in connection with such extinguishment or disposition, such trust enters into one or more hedging transactions (as defined in clause (ii) or (iii) of section 1221(b)(2)(A)) with respect to any position referred to in subclause (I),
.
Identification requirements
In general
Subparagraph (G) of
section 856(c)(5), as amended by subsection (a), is amended by striking
and
at the end of clause (ii), by striking the period at the end
of clause (iii) and inserting , and
, and by adding at the end
the following new clause:
clauses (i), (ii), and (iii) shall not apply with respect to any transaction unless such transaction satisfies the identification requirement described in section 1221(a)(7) (determined after taking into account any curative provisions provided under the regulations referred to therein).
.
Conforming amendments
Subparagraph (G) of section 856(c)(5) is amended—
by striking
which is clearly identified pursuant to section 1221(a)(7)
in
clause (i), and
by striking
, 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)
in clause (ii).
Effective date
The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.
Earnings and Profits of Real Estate Investment Trusts
Modification of real estate investment trust earnings and profits calculation to avoid duplicate taxation
Earnings and profits not increased by amounts allowed in computing taxable income in prior years
In general
Paragraph (1) of section 857(d) is amended to read as follows:
In general
The earnings and profits of a real estate investment trust for any taxable year (but not its accumulated earnings) shall not be reduced by any amount which—
is not allowable in computing its taxable income for such taxable year, and
was not allowable in computing its taxable income for any prior taxable year.
.
Exception for purposes of determining dividends paid deduction
Paragraph (1) of section 562(e), as amended by section 302, is amended—
by striking
deduction, the earnings
and inserting the
following:
deduction—
the earnings
,
by striking the period at the end and
inserting , and
, and
by adding at the end the following new subparagraph:
section 857(d)(1) shall be applied without regard to subparagraph (B) thereof.
.
Conforming amendments
Subsection (d) of section 857 is amended by adding at the end the following new paragraphs:
Real estate investment trust
For purposes
of this subsection, the term real estate investment trust
includes a domestic corporation, trust, or association which is a real estate
investment trust determined without regard to the requirements of subsection
(a).
Special rules for determining earnings and profits for purposes of the deduction for dividends paid
For special rules for determining the earnings and profits of a real estate investment trust for purposes of the deduction for dividends paid, see section 562(e)(1).
.
Treatment of gain on sales of real property
Subparagraph (A) of section 562(e)(1), as amended by section 202 and subsection (a), is amended to read as follows:
the earnings and profits of such trust for any taxable year (but not its accumulated earnings) shall be increased by the amount of gain (if any) on the sale or exchange of real property which is taken into account in determining the taxable income of such trust for such taxable year (and not otherwise taken into account in determining such earnings and profits), and
.
Effective date
The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.