19 November 2024 • 1 minute read

REIT Tax News - November 2024

Welcome to the November 2024 issue of REIT Tax News. Below, we summarize five key developments impacting REITs this past year.

IRS approves new REIT with no initial income or assets (PLR 202440007)

The Treasury Department released a private letter ruling (PLR) on October 4, 2024, stating that a REIT without any income or assets in its first year of operation passes its REIT gross income and asset tests. This technical issue has been a point of contention among tax advisors. For more information on PLR 202440007, see our client alert.

Final domestically controlled REIT regulations

In April 2024, the final “domestically controlled” REIT regulations were issued by the Treasury Department, which increased the look-through threshold from 25 percent to 50 percent and granted certain existing REIT structures a ten-year exemption from the look-through rules. See our client alert for additional impacts that the newly issued regulations have had on REITs and their foreign owners.

Loper Bright standard upheld in Varian Medical case

In deciding Loper Bright v. Raimondo, the Supreme Court transferred deference in interpreting statutory ambiguity from federal agencies to the courts. The Tax Court applied the new standard in Varian Medical Systems Inc. v. Commissioner, holding that the US Treasury Department, through its regulations, overstepped its bounds by “impermissibly attempt[ing] to change an unambiguous provision of the [Section 78 dividend] statute.” The Loper Bright decision marks a new paradigm in how courts are approaching disputes involving federal agencies, including the IRS, particularly in cases in which the legitimacy of regulatory interpretations is challenged. For more information on the impacts of Loper Bright, see our client alert.

IRS rules on use of clean energy sources by REITs

The IRS actively promulgated regulations and rulings in the clean energy space relating to REITs this past year. In January 2024, via PLRs 202401011 and 202402002, the IRS ruled that income attributable to the issuance of certain carbon emission offsets will be considered qualifying income for REIT income test purposes. In March 2024, the IRS held in a PLR that making electric vehicle (EV) stations available to tenants at no charge will not be deemed an impermissible tenant service for REIT purposes. For further discussion on PLR 202413004 and related energy initiatives, see our article.

In April 2024, the Treasury Department released final regulations providing clarity on the tax treatment of green energy tax credits for REITs under the Inflation Reduction Act (IRA). For more information of the how these regulations impact REITS, see our client alert.

Most recently, the IRS issued PLR 202429003, clarifying that a Commercial Property Assessed Clean Energy (C-PACE) asset is an obligation secured by an interest in real property and may be included in the pool of “qualified mortgages” a Real Estate Mortgage Investment Conduit (REMIC) may claim.

Despite the high volume of IRS activity in ruling on clean energy initiatives and their impact on REITs, ambiguities remain regarding the treatment of certain energy credits and clean energy assets with respect to REITs. We expect this area of the law to continue to evolve for REITs in the coming year.

Election results suggest tax reform in 2025

2025 may be a critical year for tax reform. While no formal bills have been published, taxpayers may expect tax reform enacted by April 2025 (ie, the first 100 days). Of particular interest to the REIT and real estate industry, potential tax changes may include (a) an extension of many provisions of the 2017 Tax Cuts and Jobs Act, which are set to expire (including Section 199A, which provides a deduction on ordinary REIT dividends for individuals, and immediate expensing of qualified property) and (b) lowering the corporate tax rate from 21 percent to 20 percent – which would impact taxable REIT subsidiaries.

The tax writers may be looking for potential offsets. Some Republican tax writers have raised the possibility of using the repeal of the IRA green energy tax credits as offsets. However, there may be resistance among some Republican members in regard to eliminating these tax benefits. President-elect Donald Trump has suggested that economic growth could offset some of the cost, as well as the imposition of tariffs on certain imported goods.