In developing the rules applicable to real estate investment trusts, Congress, and to a lesser extent, the Treasury, have sought to balance two competing objectives: (1) permit investors to participate and invest in a corporate entity holding real estate without being subject to the double taxation ordinarily associated with an investment in a c-corporation, and (2) limit the intrusion on the corporate tax regime generally imposed by Subchapter C by restricting REITs to holding and deriving income from relatively passive investments in real property and debt secured by real property. The manner in which this balance has been struck has evolved very substantially since the first REIT legislation was enacted in 1960, generally moving in the direction of allowing REITs greater flexibility to deal with real world business concerns and pressures. After 48 years, the rules delineating how various classes of income are treated for purposes of the 95% and 75% gross income tests applicable to REITs are now fairly detailed and complex. Even so, ambiguities, and in some cases, incongruities, have persisted. The 2008 Housing Act favorably resolves many income-related issues with which practitioners have struggled, and provides the Treasury with statutory authority to address other, as of yet unresolved issues, through future regulations.
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