Rev. Rul. 71-286

Advice has been requested whether, for purposes of qualifying a trust as a real estate investment trust, air rights over the real property are considered "interests in real property" within the meaning of section 856(c)(6)(C) of the Internal Revenue Code of 1954 and "real estate assets" within the meaning of sections 856(c)(5)(A) and 856(c)(6)(B) of the Code.

An unincorporated trust, otherwise qualifying as a real estate investment trust under section 856 of the Code, plans to invest in air rights over real property along with other real estate assets. The term air rights as defined by the trust means the long-term leasehold or fee simple ownership of the space above the ground that a landowner can occupy or use in connection with the land, plus necessary easements on the surface for support of structures erected in such air space. The interests in air space are described by metes and bounds and normally entitled the lessee or owner thereof to free and unrestricted use of the air space subject to zoning laws, non-interference with structures constructed upon the land surface, easements and restrictions of records, and the like. Normally investments in air rights will take the form of long-term leaseholds (i.e., 50 years to 100 years).

Section 856(c) of the Code provides that for a trust to qualify as a real estate investment trust for Federal income tax purposes, certain percentages of the trust's gross income must be derived from specified sources, such as real property (including interests in real property). In addition a certain percentage of the trust's assets must be represented by specified items including "real estate assets."

The term "interests in real property" is defined in section 856(c)(6)(C) of the Code to include "fee ownership and co-ownership of land or improvements thereon and leaseholds of land or improvements thereon, but does not include mineral, oil, or gas royalty interests." The term "real estate assets" is defined in section 856(c)(6)(B) of the Internal Revenue Code of 1954 to mean real property (including interests in real property and interests in mortgages on real property) and shares (or transferable certificates of beneficial interests) in other qualified real estate investment trusts.

Section 1.856-3(d) of the Income Tax Regulations provides that the term "real property" means land or improvements thereon, such as buildings or other inherently permanent structures thereon (including items which are structural components of such buildings or structures). In addition, the term "real property" includes interests in real property. Local law definitions will not be controlling for purposes of determining the meaning of the term "real property" as used in section 856 and the regulations thereunder.

The Tax Court of the Unted States in the case of Mattie Fair v. Commissioner. 2 T.C. 8676 (1957), acquiescence, C.B. 1957-2, 4, stated that the right to use the air space superjacent to the ground is one of the rights in land and that these air rights are frequently the most valuable rights connected with the ownership of land since the value of commercial property consists almost exclusively of the right of the owner to erect business and industrial structures thereon.

Accordingly, in the instant case, the air rights over real property are considered "interests in real property" within the meaning of section 856(c)(6)(C) of the Code and "real estate assets" within the meaning of sections 856(c)(5)(A) and 856(c)(6)(B) of the Code. Therefore any gain from the sale or disposition of the air rights is gain from the sale or other disposition of an interest in real property within the meaning of section 856(c)(2)(D) of the Code, and any income derived from rental of the air rights is gross income derived from an interest in real property within the meaning of sections 856(c)(2)(C) and 856(c)(3)(A) of the Code.