The IRS today publicly released a private letter ruling* in which it ruled that income received by a real estate investment trust (REIT) from its tenants for the use of the boat slips and storage spaces at a marina (as described) would constitute rents from real property for REIT qualification purposes.
The IRS further ruled that income that is attributable to making available to all tenants, at no additional cost, a space such as the shower facilities is not income from the provision of a service and is, therefore, not impermissible tenant service income.
Finally, the IRS ruled that income from the described services that will be provided at the marina is not impermissible tenant service income based on certain representations from the REIT and, therefore, would not cause otherwise qualifying rents from real property to be treated otherwise.
Read PLR 201944011 [PDF 59 KB] (released November 1, 2019, and dated August 6, 2019)
*Private letter rulings are taxpayer-specific rulings furnished by the IRS Office of Chief Counsel in response to requests made by taxpayers and can only be relied upon by the taxpayer to whom issued. Pursuant to section 6110(k)(3), written determinations such as private letter rulings are not intended to be relied upon by third parties and may not be cited as precedent. These written determinations may, however, offer an indication of the IRS’s position on the issues addressed.
The facts presented in the letter ruling are summarized as follows:
With respect to payments received by the taxpayer, the IRS reasoned:
The rights to use a boat slip to moor a boat under a wharfage contract and to use a storage space under a storage contract are rights to use and occupy the space above the seabed or in buildings permanently affixed to the shore.
Based on the taxpayer’s representation concerning services being customary and the value of any personal property, the IRS ruled that the income received by the taxpayer from its tenants for the use of the boat slips and storage spaces would constitute rents from real property under the REIT rules.
With respect to shower facilities, the IRS reasoned “[a]lthough services may be provided in the Shower Facilities, the Shower Facilities themselves are not services,” and “[a]ny services that are provided in or with respect to the Shower Facilities are analyzed as any other service provided to tenants.” Based on the manner under which services will be furnished and represented by the taxpayer, the IRS ruled income from the services that will be provided at the marina would not be impermissible tenant service income and, therefore, would not cause any portion of the qualifying rents received by the taxpayer to fail to qualify as rents from real property under the REIT rules.
Tax professionals have noted that Reg. section 1.856-10(c) already contains an example involving a marina, which is comprised of U-shaped boat slips and end ties. The example concludes that the boat slips and end ties are water space superjacent to land that is land under the regulations and, therefore, are real property.
It is further noted that this is the third letter ruling involving a marina property for REIT purposes.
These letter rulings provide a road map for using the REIT structure to acquire, own and operate marina properties.
Finally, note that because of the definition of “impermissible tenant service income” takes into account rules for the unrelated business taxable income for exempt organizations, the IRS has expanded its disclaimer lately. Specifically, the IRS stated in PLR 201944011:
The definition of rents from real property under section 856(d) differs in scope and structure from the definition of rents from real property under section 512(b)(3), which applies to exempt organizations described in section 511(a)(2). Therefore, an exempt organization providing the same services may have unrelated business taxable income because the income may not be excluded under section 512(b)(3) as rents from real property.
It is comforting to see that the IRS has continued with its view (expressed in PLR 201812009) that making facilities available to tenants by itself is not considered a service for purposes of impermissible tenant service income.
For more information, contact a tax professional with KPMG’s Washington National Tax:
David W. Lee | +1 (202) 533-4071 | email@example.com
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