The Internal Revenue Service (IRS) and Treasury Department today issued a much-welcomed technical correction to the effective date of the recently issued “built-in gain” regulations regarding real estate investment trust (REIT) spin-off transactions. As described in our June 8, 2016, client alert “IRS Expands REIT Spin-Off Restrictions, Extends REIT Built-in Gains Period to 10 Years,” we had encouraged the IRS to clarify that the new regulations would not apply to spin-offs that occurred before December 7, 2015 (i.e., before the effective date of the REIT spin-off rules contained in the Protecting Americans From Tax Hikes Act of 2015 (PATH Act)), and that any impression to the contrary was unintentional. The technical correction issued today makes that clarification, thereby aligning the new regulations with the PATH Act. Thus, as under the PATH Act, an entity that engaged in a tax-free spin-off before December 7, 2015, can convert to a REIT or be acquired by a REIT without being subject to immediate tax on all of the built-in gain in its assets.
We thank the Treasury for its quick correction and look forward to its response in the formal comment process to the more substantive issues created by the new regulations.