Rev. Rul. 77-459

Advice has been requested whether, under the circumstances described below, an apportionment of the interest received by a real estate investment trust is required for purposes of section 856(c)(3)(B) of the Internal Revenue Code of 1954 and whether an apportionment is required to determine the amount of real estate assets held by the trust for purposes of section 856(c)(5)(A).

T, an unincorporated trust otherwise qualifying as a real estate investment trust under section 856 of the Code, made a construction loan, which is secured by a first mortgage on real property held by N, an Illinois land trust. P, a partnership, is the sole beneficiary of N. Upon the direction of P, the trustee of N executed a mortgage note in the principal amount of the loan. P assigned to T its entire beneficial interest in N solely for purposes of simplifying foreclosure proceedings in the event of a default on the loan. The sole asset of N during the term of the loan will be the real property subject to the mortgage.

Section 856(c) of the Code provides, in part, that a trust shall not be considered a real estate investment trust for any taxable year unless certain requirements are satisfied.

Section 856(c)(3)(B) of the Code provides that a trust must derive at least 75 percent of its gross income from, among other items, interest on obligations secured by mortgages on real property or on interests in real property.

Section 1.856-2(c)(2)(ii) of the Income Tax Regulations provides, in part, that where a mortgage covers both real and other property an apportionment of the interest income must be made for purposes of the 75-percent requirement.

Section 856(c)(5)(A) of the Code provides that at the close of each quarter of the taxable year at least 75 percent of the value of a trust's total assets must be represented by real estate assets, cash and cash items (including receivables), and Government securities.

Section 856(c)(6)(B) of the Code provides that the term "real estate assets" means real property (including interests in real property and interests in mortgages on real property) and shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of sections 856 through 860.

An Illinois "land trust" is any arrangement under which the title, both legal and equitable, to real property, is held by a trustee and the interest of the beneficiary is personal property, and under which the beneficiary, or any person designated in writing by the beneficiary, has the exclusive power to direct or control the trustee in dealing with the title. The exclusive control of the management, operation, renting and selling of the trust property together with the exclusive right to the earnings, avails and proceeds of said property is in the beneficiary of the trust. Ill. Ann. Stat. ch. 29, section 8.31 (Smith-Hurd Supp. 1976).

Thus, although the beneficial interest in an Illinois land trust is personal property under Illinois law, so long as the real property remains the sole asset of the land trust, the beneficial interest has no value apart from the underlying property.

Accordingly, in the instant case, no apportionment of either the interest income or the assets is necessary for purposes of meeting the 75-percent gross income requirement of section 856(c)(3) of the Code and the 75-percent assets requirement of section 856(c)(5)(A), respectively. The interest income constitutes interest on obligations secured by mortgages on real property or on interests in real property for purposes of section 856(c)(3)(B), and the construction loan constitutes a real estate asset for purposes of section 856(c)(5)(A).