I
103D CONGRESS
1ST SESSION
H. R. 749
To amend the Internal Revenue Code of 1986 to encourage investment in
real estate and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
FEBRUARY 3, 1993
Mr. ANDREWS of Texas (for himself, Mr. THOMAS of California, Mr. MATSUI,
Mr. SHAW, Mr. HERGER, Mr. SUNDQUIST, Mr. MCCRERY, Mr. JEFFER-
SON, Mr. BREWSTER, Mr. GRANDY, Mr. NEAL of Massachusetts, Mr. JA-
COBS, Mr. ARCHER, Mr. HANCOCK, Mr. CARDIN, Mr. SANTORUM, Mr.
PAYNE of Virginia, Mr. BUNNING, Mr. PICKLE, Mr. KOPETSKI, Mr.
HOUGHTON, Mr. MCNULTY, Mr. DICKS, Mr. PETE GEREN of Texas, Mr.
MORAN, Mr. CRANE, Mrs. JOHNSON of Connecticut, Mr. LEHMAN, Mr.
LEWIS of California, Mr. LEWIS of Georgia, Mr. BEREUTER, Ms.
DANNER, and Mr. GILMAN) introduced the following bill; which was re-
ferred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to encourage
investment in real estate and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; REFERENCE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Real Estate Stability and Recovery Amendments Act of
1993’’.
(b) REFERENCE.—Except as otherwise expressly pro-
vided, whenever in this Act an amendment or repeal is
expressed in terms of an amendment to, or repeal of, a
section or other provision, the reference shall be consid-
ered to be made to a section or other provision of the In-
ternal Revenue Code of 1986.
TITLE I—MODIFICATION OF
PASSIVE LOSS RULES
SEC. 101. APPLICATION OF PASSIVE LOSS RULES TO RENT-
AL REAL ESTATE ACTIVITIES.
(a) RENTAL REAL ESTATE ACTIVITIES OF PERSONS
IN REAL PROPERTY BUSINESS NOT AUTOMATICALLY
TREATED AS PASSIVE ACTIVITIES.—Subsection (c) of sec-
tion 469 (defining passive activity) is amended by adding
at the end thereof the following new paragraph:
‘‘(7) SPECIAL RULES FOR TAXPAYERS IN REAL
PROPERTY BUSINESS.—
‘‘(A) IN GENERAL.—If this paragraph ap-
plies to any taxpayer for a taxable year—
‘‘(i) paragraph (2) shall not apply to
any rental real estate activity of such tax-
payer for such taxable year, and
‘‘(ii) this section shall be applied as if
each interest of the taxpayer in rental real
estate were a separate activity.
Notwithstanding clause (ii), a taxpayer may
elect to treat all interests in rental real estate
as one activity. Nothing in the preceding provi-
sions of this subparagraph shall be construed as
affecting the determination of whether the tax-
payer materially participates with respect to
any interest in a limited partnership as a lim-
ited partner.
‘‘(B) TAXPAYERS
TO
WHOM
PARAGRAPH
APPLIES.—This paragraph shall apply to a tax-
payer for a taxable year if more than one-half
of the personal services performed in trades or
businesses by the taxpayer during such taxable
year are performed in real property trades or
businesses in which the taxpayer materially par-
ticipates.
‘‘(C) REAL
PROPERTY
TRADE
OR
BUSI-
NESS.—For purposes of this paragraph, the
term ‘real property trade or business’ means
any real property development, redevelopment,
construction, reconstruction, acquisition, con-
version, rental, operation, management, leasing,
or brokerage trade or business.
‘‘(D) SPECIAL RULES FOR SUBPARAGRAPH
(B).—
‘‘(i) CLOSELY
HELD
C
CORPORA-
TIONS.—In the case of a closely held C
corporation, the requirements of subpara-
graph (B) shall be treated as met for any
taxable year if more than 50 percent of the
gross receipts of such corporation for such
taxable year are derived from real property
trades or businesses in which the corpora-
tion materially participates.
‘‘(ii) PERSONAL SERVICES AS AN EM-
PLOYEE.—For purposes of subparagraph
(B), personal services performed as an em-
ployee shall not be treated as performed in
real property trades or businesses. The
preceding sentence shall not apply if such
employee is a 5-percent owner (as defined
in section 416(i)(1)(B)) in the employer.’’
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 469(c) is amended
by striking ‘‘The’’ and inserting ‘‘Except as provided
in paragraph (7), the’’.
(2) Clause (iv) of section 469(i)(3)(E) is
amended by inserting ‘‘or any loss allowable by rea-
son of subsection (c)(7)’’ after ‘‘loss’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1992.
TITLE 
II—PROVISIONS 
RELAT-
ING TO REAL ESTATE INVEST-
MENTS BY PENSION FUNDS
SEC. 201. REAL ESTATE PROPERTY ACQUIRED BY A QUALI-
FIED ORGANIZATION.
(a) MODIFICATIONS
OF EXCEPTIONS.—Paragraph
(9) of section 514(c) (relating to real property acquired
by a qualified organization) is amended by adding at the
end thereof the following new subparagraphs:
‘‘(G) SPECIAL RULES FOR PURPOSES OF
THE
EXCEPTIONS.—Except as otherwise pro-
vided by regulations—
‘‘(i) SMALL LEASES DISREGARDED.—
For purposes of clauses (iii) and (iv) of
subparagraph (B), a lease to a person de-
scribed in such clause (iii) or (iv) shall be
disregarded if no more than 25 percent of
the leasable floor space in a building is
covered by the lease and if the lease is on
commercially reasonable terms.
‘‘(ii) COMMERCIALLY REASONABLE FI-
NANCING.—Clause (v) of subparagraph (B)
shall not apply if the financing is on com-
mercially reasonable terms.
‘‘(H) QUALIFYING
SALES
BY
FINANCIAL
INSTITUTIONS.—
‘‘(i) IN GENERAL.—In the case of a
qualifying sale by a financial institution,
except as provided in regulations, clauses
(i) and (ii) of subparagraph (B) shall not
apply with respect to financing provided by
such institution for such sale.
‘‘(ii) QUALIFYING
SALE.—For pur-
poses of this clause, there is a qualifying
sale by a financial institution where—
‘‘(I) a qualified organization ac-
quires property described in clause
(iii) from a financial institution and
any gain recognized by the financial
institution with respect to the prop-
erty is ordinary income,
‘‘(II) the stated principal amount
of the financing provided by the finan-
cial institution does not exceed the
amount of the outstanding indebted-
ness (including accrued but unpaid in-
terest) of the financial institution with
respect to the property described in
clause (iii) immediately before the ac-
quisition referred to in clause (iii) or
(v), whichever is applicable, and
‘‘(III) the value (determined as
of the time of the sale) of the amount
pursuant to the financing that is de-
termined by reference to the revenue,
income, or profits derived from the
property does not exceed 30 percent
of the value of the property (deter-
mined as of such time).
‘‘(iii) PROPERTY TO WHICH SUBPARA-
GRAPH APPLIES.—Property is described in
this clause if such property is foreclosure
property, or is real property which—
‘‘(I) was acquired by the quali-
fied organization from a financial in-
stitution which is in conservatorship
or receivership, or from the conserva-
tor or receiver of such an institution,
and
‘‘(II) was held by the financial
institution at the time it entered into
conservatorship or receivership.
‘‘(iv) FINANCIAL
INSTITUTION.—For
purposes of this subparagraph, the term
‘financial institution’ means—
‘‘(I) any financial institution de-
scribed in section 581 or 591(a),
‘‘(II) any other corporation which
is a direct or indirect subsidiary of an
institution referred to in subclause (I)
but only if, by virtue of being affili-
ated with such institution, such other
corporation is subject to supervision
and examination by a Federal or
State agency which regulates institu-
tions referred to in subclause (I), and
‘‘(III) any person acting as a
conservator or receiver of an entity re-
ferred to in subclause (I) or (II) (or
any government agency or corporation
succeeding to the rights or interest of
such person).
‘‘(v) FORECLOSURE PROPERTY.—For
purposes of this subparagraph, the term
‘foreclosure property’ means any real prop-
erty acquired by the financial institution as
the result of having bid on such property
at foreclosure, or by operation of an agree-
ment or process of law, after there was a
default (or a default was imminent) on in-
debtedness which such property secured.’’.
(b) CONFORMING AMENDMENT.—Paragraph (9) of
section 514(c) is amended—
(1) by adding the following new sentence at the
end of subparagraph (A): ‘‘For purposes of this
paragraph, an interest in a mortgage shall in no
event be treated as real property.’’, and
(2) by striking the last sentence of subpara-
graph (B).
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply to acquisitions on or after
January 1, 1993.
(2) SMALL LEASES.—The provisions of section
514(c)(9)(G)(i) of the Internal Revenue Code of
1986 shall, in addition to any leases to which the
provisions apply by reason of paragraph (1), apply
to leases entered into on or after January 1, 1993.
SEC. 202. SPECIAL RULES FOR INVESTMENTS IN PARTNER-
SHIPS.
(a) MODIFICATION TO ANTI-ABUSE RULES.—Para-
graph (9) of section 514(c) (as amended by section 201)
is amended by adding at the end thereof the following new
subparagraph:
‘‘(J) PARTNERSHIPS NOT INVOLVING TAX
AVOIDANCE.—
‘‘(i) DE MINIMIS RULE FOR CERTAIN
LARGE PARTNERSHIPS.—The provisions of
subparagraph (B) shall not apply to an in-
vestment in a partnership having at least
250 partners if—
‘‘(I) interests in such partnership
were offered for sale in an offering
registered with the Securities and Ex-
change Commission,
‘‘(II) at least 50 percent of each
class of interests in such partnership
is owned by individuals who are not
disqualified persons, and
‘‘(III) the principal purpose of
partnership allocations is not tax
avoidance.
The Secretary may disregard inadvertent
failures to meet the requirements of
subclause (II). For purposes of subclause
(II), interests owned by individual retire-
ment 
plans 
(as 
defined 
in 
section
7701(a)(37)) shall not be taken into ac-
count.
‘‘(ii) DISQUALIFIED
PERSONS.—For
purposes of this subparagraph, the term
‘disqualified person’ means any person de-
scribed in clause (iii) or (iv) of subpara-
graph (B) and any person who is not a
United States person.’’.
(b) REPEAL OF SPECIAL TREATMENT OF PUBLICLY
TRADED PARTNERSHIPS.—Subsection (c) of section 512
is amended—
(1) by striking paragraph (2),
(2) by redesignating paragraph (3) as para-
graph (2), and
(3) by striking ‘‘paragraph (1) or (2)’’ in para-
graph (2) (as so redesignated) and inserting ‘‘para-
graph (1)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership years ending after
December 31, 1992.
SEC. 203. TITLE-HOLDING COMPANIES PERMITTED TO RE-
CEIVE 
SMALL 
AMOUNTS 
OF 
UNRELATED
BUSINESS TAXABLE INCOME.
(a) GENERAL RULE.—Paragraph (25) of section
501(c) is amended by adding at the end thereof the follow-
ing new subparagraph:
‘‘(G)(i) An organization shall not be treat-
ed as failing to be described in this paragraph
merely by reason of the receipt of any otherwise
disqualifying income which is incidentally de-
rived from the holding of real property.
‘‘(ii) Clause (i) shall not apply if the
amount of gross income described in such
clause exceeds 10 percent of the organization’s
gross income for the taxable year unless the or-
ganization establishes to the satisfaction of the
Secretary that the receipt of gross income de-
scribed in clause (i) in excess of such limitation
was inadvertent and reasonable steps are being
taken to correct the circumstances giving rise to
such income.’’
(b) CONFORMING AMENDMENT.—Paragraph (2) of
section 501(c) is amended by adding at the end thereof
the following new sentence: ‘‘Rules similar to the rules of
subparagraph (G) of paragraph (25) shall apply for pur-
poses of this paragraph.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1992.
SEC. 204. EXCLUSION FROM UNRELATED BUSINESS TAX OF
GAINS FROM CERTAIN PROPERTY.
(a) GENERAL RULE.—Subsection (b) of section 512
(relating to modifications) is amended by adding at the
end thereof the following new paragraph:
‘‘(16)(A) Notwithstanding paragraph (5)(B),
there shall be excluded all gains or losses from the
sale, exchange, or other disposition of any real prop-
erty described in subparagraph (B) if—
‘‘(i) such property was acquired by the or-
ganization from—
‘‘(I) a financial institution described
in section 581 or 591(a) which is in
conservatorship or receivership, or
‘‘(II) the conservator or receiver of
such an institution (or any government
agency or corporation succeeding to the
rights or interests of the conservator or re-
ceiver),
‘‘(ii) such property is designated by the or-
ganization within the 9-month period beginning
on the date of its acquisition as property held
for sale, except that not more than one-half (by
value determined as of such date) of property
acquired in a single transaction may be so
designated,
‘‘(iii) such sale, exchange, or disposition
occurs before the later of—
‘‘(I) the date which is 30 months after
the date of the acquisition of such prop-
erty, or
‘‘(II) the date specified by the Sec-
retary in order to assure an orderly dis-
position of property held by persons de-
scribed in subparagraph (A), and
‘‘(iv) while such property was held by the
organization, the aggregate expenditures on im-
provements and development activities included
in the basis of the property are (or were not)
in excess of 20 percent of the net selling price
of the property with respect to such property.
‘‘(B) Property is described in this subparagraph
if it is real property which—
‘‘(i) was held by the financial institution at
the time it entered into conservatorship or re-
ceivership, or
‘‘(ii) was foreclosure property (as defined
in section 514(c)(9)(H)(v)) which secured in-
debtedness held by the financial institution at
such time.
For purposes of this subparagraph, real property in-
cludes an interest in a mortgage.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to property acquired on or after
January 1, 1993.
SEC. 205. EXCLUSION FROM UNRELATED BUSINESS TAX
OF CERTAIN FEES AND OPTION PREMIUMS.
(a) LOAN COMMITMENT FEES.—Paragraph (1) of
section 512(b) (relating to modifications) is amended by
inserting ‘‘amounts received or accrued as consideration
for entering into agreements to make loans,’’ before ‘‘and
annuities’’.
(b) OPTION PREMIUMS.—The second sentence of sec-
tion 512(b)(5) is amended by inserting ‘‘or real property’’
before the period.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to amounts received on or after
January 1, 1993.
SEC. 206. TREATMENT OF PENSION FUND INVESTMENTS
IN REAL ESTATE INVESTMENT TRUSTS.
(a) GENERAL RULE.—Subsection (h) of section 856
(relating to closely held determinations) is amended by
adding at the end thereof the following new paragraph:
‘‘(3) TREATMENT
OF
TRUSTS
DESCRIBED
IN
SECTION 401(a).—
‘‘(A) LOOK-THRU TREATMENT.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), in determining whether
the stock ownership requirement of section
542(a)(2) is met for purposes of paragraph
(1)(A), any stock held by a qualified trust
shall be treated as held directly by its
beneficiaries in proportion to their actuar-
ial interests in such trust and shall not be
treated as held by such trust.
‘‘(ii) CERTAIN RELATED TRUSTS NOT
ELIGIBLE.—Clause (i) shall not apply to
any qualified trust if one or more disquali-
fied 
persons 
(as 
defined 
in 
section
4975(e)(2), without regard to subpara-
graphs (B) and (I) thereof) with respect to
such qualified trust hold in the aggregate
5 percent or more in value of the interests
in the real estate investment trust and
such real estate investment trust has accu-
mulated earnings and profits attributable
to any period for which it did not qualify
as a real estate investment trust.
‘‘(B) 
COORDINATION
WITH
PERSONAL
HOLDING
COMPANY
RULES.—If any entity
qualifies as a real estate investment trust for
any taxable year by reason of subparagraph
(A), such entity shall not be treated as a per-
sonal holding company for such taxable year for
purposes of part II of subchapter G of this
chapter.
‘‘(C) TREATMENT FOR PURPOSES OF UN-
RELATED
BUSINESS
TAX.—If any qualified
trust holds more than 10 percent (by value) of
the interests in any pension-held REIT at any
time during a taxable year, the trust shall be
treated as having for such taxable year gross
income from an unrelated trade or business in
an amount which bears the same ratio to the
aggregate dividends paid (or treated as paid) by
the REIT to the trust for the taxable year of
the REIT with or within which the taxable year
of the trust ends (the ‘REIT year’) as—
‘‘(i) the gross income (less direct ex-
penses related thereto) of the REIT for the
REIT year from unrelated trades or busi-
nesses (determined as if the REIT were a
qualified trust), bears to
‘‘(ii) the gross income (less direct ex-
penses related thereto) of the REIT for the
REIT year.
This subparagraph shall apply only if the ratio
determined under the preceding sentence is at
least 5 percent.
‘‘(D) PENSION-HELD REIT.—For purposes
of subparagraph (C)—
‘‘(i) IN GENERAL.—A real estate in-
vestment trust is a pension-held REIT if
such trust would not have qualified as a
real estate investment trust but for the
provisions of this paragraph and if such
trust is predominantly held by qualified
trusts.
‘‘(ii) PREDOMINANTLY
HELD.—For
purposes of clause (i), a real estate invest-
ment trust is predominantly held by quali-
fied trusts if—
any qualified real property business indebted-
ness shall not exceed the excess (if any) of—
‘‘(i) the outstanding principal amount
of such indebtedness (immediately before
the discharge), over
‘‘(ii) the fair market value of the real
property described in paragraph (3)(A) (as
of such time), reduced by the outstanding
principal amount of any other qualified
real property business indebtedness se-
cured by such property (as of such time).
‘‘(B) OVERALL LIMITATION.—The amount
excluded under subparagraph (D) of subsection
(a)(1) shall not exceed the aggregate adjusted
bases of depreciable real property (determined
after any reductions under subsections (b) and
(g)) held by the taxpayer immediately before
the discharge (other than depreciable real prop-
erty acquired in contemplation of such dis-
charge).
‘‘(3) QUALIFIED REAL PROPERTY BUSINESS IN-
DEBTEDNESS.—The term ‘qualified real property
business indebtedness’ means indebtedness which—
‘‘(A) was incurred or assumed by an indi-
vidual in connection with real property used in
a trade or business and is secured by such real
property,
‘‘(B) was incurred or assumed before Jan-
uary 1, 1993, or if incurred or assumed on or
after such date, is qualified acquisition indebt-
edness, and
‘‘(C) with respect to which such taxpayer
makes an election to have this paragraph apply.
Such term shall not include qualified farm indebted-
ness. Indebtedness under subparagraph (B) shall in-
clude indebtedness resulting from the refinancing of
indebtedness under subparagraph (B) (or this sen-
tence), but only to the extent it does not exceed the
amount of the indebtedness being refinanced.
‘‘(4) 
QUALIFIED
ACQUISITION
INDEBTED-
NESS.—For purposes of paragraph (3)(B), the term
‘qualified acquisition indebtedness’ means, with re-
spect to any real property described in paragraph
(3)(A), indebtedness incurred or assumed to acquire,
construct, reconstruct, or substantially improve such
property.
‘‘(5) REGULATIONS.—The Secretary shall issue
such regulations as are necessary to carry out this
subsection, including regulations preventing the
abuse 
of 
this 
subsection 
through 
cross-
collateralization or other means.’’
(c) TECHNICAL AMENDMENTS.—
(1) Subparagraph (A) of section 108(a)(2) is
amended by striking ‘‘and (C)’’ and inserting ‘‘, (C),
and (D)’’.
(2) Subparagraph (B) of section 108(a)(2) is
amended to read as follows:
‘‘(B) 
INSOLVENCY
EXCLUSION
TAKES
PRECEDENCE OVER QUALIFIED FARM EXCLU-
SION
AND
QUALIFIED
REAL
PROPERTY
BUSI-
NESS EXCLUSION.—Subparagraphs (C) and (D)
of paragraph (1) shall not apply to a discharge
to the extent the taxpayer is insolvent.’’
(3) Subsection (d) of section 108 is amended by
striking ‘‘Subsections (a), (b), and (g)’’ each place
it appears in the heading thereof and in the text and
headings of paragraphs (6) and (7)(A) and inserting
‘‘Subsections (a), (b), (c), and (g)’’.
(4) Subparagraph (B) of section 108(d)(7) is
amended by adding at the end thereof the following
new sentence: ‘‘The preceding sentence shall not
apply to any discharge to the extent that subsection
(a)(1)(D) applies to such discharge.’’
(5) Subparagraph (A) of section 108(d)(9) is
amended by inserting ‘‘or under paragraph (3)(B) of
subsection (c)’’ after ‘‘subsection (b)’’.
(6) Paragraph (2) of section 1017(a) is amend-
ed by striking ‘‘or (b)(5)’’ and inserting ‘‘, (b)(5), or
(c)(1)’’.
(7) Subparagraph (A) of section 1017(b)(3) is
amended by inserting ‘‘or (c)(1)’’ after ‘‘subsection
(b)(5)’’.
(8) Section 1017(b)(3) is amended by adding at
the end the following new subparagraph:
‘‘(F) SPECIAL
RULES
FOR
QUALIFIED
REAL
PROPERTY
BUSINESS
INDEBTEDNESS.—
In the case of any amount which under section
108(c)(1) is to be applied to reduce basis—
‘‘(i) depreciable property shall only in-
clude depreciable real property for pur-
poses of subparagraphs (A) and (C),
‘‘(ii) subparagraph (E) shall not
apply, and
‘‘(iii) in the case of property taken
into account under section 108(c)(2)(B),
the reduction with respect to such property
shall be made as of the time immediately
before disposition if earlier than the time
under subsection (a).’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to discharges after December 31,
1992, in taxable years ending after such date.
Æ
HR 749 IH——2