IRS excludes REIT hedge and offsetting hedge income from gross income tests
PLR 202601013. Released January 2, 2026.
A mortgage REIT can exclude income from interest rate swaps, swaptions, and offsetting hedge positions from its 75% and 95% gross income tests when the hedges manage borrowing risk tied to real estate assets and are correctly identified.
Holding
The IRS issued a private letter ruling (PLR) that income from both primary interest rate hedges and offsetting counteracting hedges does not count as gross income for purposes of the §856(c)(2) and §856(c)(3) REIT income tests.
Why It Matters
Confirms that REITs can manage interest rate risk without jeopardizing income tests.
Treats counteracting hedges as part of the same risk management framework as the original hedges.
Aligns REIT hedging treatment with general §1221 hedging rules.
Reduces pressure to terminate swaps when breakage costs are prohibitive.
Key Facts
The taxpayer is a mortgage REIT holding long-term, fixed-rate mortgage assets.
Financing comes from short-term repurchase agreements tied to SOFR.
The duration mismatch creates interest rate …
