New Proposed Regulations Treat Some Solar Property as Good REIT Assets

The IRS on Friday, May 9, 2014, issued new proposed regulations providing a framework whereby taxpayers may more easily determine which assets qualify for favorable Real Estate Investment Trust ("REIT") status, including whether, and under what circumstances, certain energy-generating assets are qualifying assets. In order for an entity to qualify for favorable tax treatment as a REIT, at least 75 percent of its assets must be "real estate assets" and substantially all of its income must consist of rents from real property, interest, dividends, and other passive income. Under existing rules real property consists of land and improvements thereon such as buildings and other inherently permanent structures and certain structural components thereof. The Proposed Regulations provide a safe harbor list of distinct assets that are buildings (such as houses, factories, warehouses and enclosed transportation stations), inherently permanent structures (such as microwave transmission, cell, broadcast and electrical transmission towers, pipelines, offshore drilling platforms, silos and gas storage tanks) and structural components (such as wiring, central heating and cooling systems, fire suppression systems and integrated security systems).

For distinct assets not specifically listed in the regulations, the Proposed Regulations adopt a "multi-factor facts and circumstances" test to be used to test the asset's qualification as a "good" REIT asset. Several examples applying this test to various assets were provided. In one example, a solar energy site owned by a REIT is leased to a third party. The assets include land, photovoltaic modules ("PV Modules"), the mounts and racks that support the PV Modules, and exit wire. The IRS concluded that the exit wire and mounts and racks were inherently permanent structures because they were not designed to be moved, and would be damaged if removed, but that the PV Modules were not real property because they are used to produce electricity for sale to third parties, which is income other than for the use or occupancy of space.

In another example, the REIT owned a similar solar energy site that was adjacent and on land next to an office building that the REIT also owned. The REIT leased both the office building and the solar energy site to a single tenant. Except for occasional transfer of excess energy produced by the site to a local utility, the solar assets were designed and intended to only provide electricity to the office building. The IRS concluded after weighing various factors, that the entire solar energy system constituted a structural component of the office building and thus qualified as good REIT property. The IRS also indicated that solar shingles installed on an office building's roof by the owner of the building would also qualify as a structural component of the building and thus qualify for REIT status.

See: REITS.See also: Cabinet FATCA Materials (for Cabinet subscribers only).For more information, please contact Daniel Mulcahy and Mark Howe.