Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 78-3

1978-1 C.B. 218

Sec. 856

IRS Headnote

Real estate investment trust; foreclosure property; redemption period. A real estate investment trust-mortgagee that instituted foreclosure proceedings on its mortgagor's real property and subsequently purchased the property at foreclosure sale, in a state whose laws provide that the mortgagor may redeem the property within one year, is considered to have acquired the property for purposes of section 856(e) of the Code upon the expiration of the unexercised right of redemption.

Full Text

Rev. Rul. 78-3

Advice has been requested concerning when real property is considered to be acquired by a real estate investment trust for purposes of section 856(e) of the Internal Revenue Code of 1954, under the circumstances described below.

A real estate investment trust, as defined in section 856 of the Code, made a loan secured by a mortgage on real property. Several years later, the mortgagor defaulted on the loan, and the trust instituted formal foreclosure proceedings. The trust subsequently purchased the property at auction, and the local court issued an order confirming the foreclosure sale of the property. Under the state law, a mortgagor may, within one year after the date of the order of confirmation, redeem the property sold by paying the amount bid for the property with interest.

In addition to providing a one-year redemption period, the applicable state law provides that, upon a foreclosure sale, the purchaser is to receive a certificate, executed in the same manner as a conveyance and recorded within 20 days after the sale. Upon the expiration of the redemption period, the certificate operates as a conveyance to the purchaser of the mortgagor's entire right, title, and interest to the property. This provision has been interpreted by the state supreme court to mean that a mortgagor, during the one-year redemption period, retains the right of ownership, including the right to possession and the right to rents and profits. The mortgagor, in this case, did not exercise its right of redemption from foreclosure within the statutory period.

Section 10.3(b) of the Temporary Income Tax Regulations under section 856(e) of the Code provides, in part, that foreclosure property that secured an indebtedness owed to the real estate investment trust is acquired for purposes of section 856(e) on the date on which the trust acquires ownership of the property for Federal income tax purposes. Generally, the fact that under local law the mortgagor has a right of redemption after foreclosure shall not be relevant in determining whether the trust has acquired ownership of the property for purposes of section 856(e).

However, the general rule does not apply in this case. Since, under the state law as interpreted by the state supreme court, the purchaser acquires ownership of property purchased upon foreclosure upon the expiration of the redemption period, the trust acquired the property for purposes of section 856(e) of the Code upon the expiration of the mortgagor's right of redemption.