Final regulations offer guidance for REITs on the transfer of energy credits

On April 25, 2024, the Treasury Department released final regulations that provide clarity on the tax treatment of green energy tax credits for REITs under the Inflation Reduction Act (IRA). The final regulations modify proposed regulations issued in June of 2023 (see our previous client alert).

The final regulations are broad in scope and impact many non-REIT taxpayers. To learn more about the final regulations, please see our overview client alert.

KEY HIGHLIGHTS

1. Eligible credits held by a REIT that have not yet been transferred are disregarded for the REIT asset tests

The Treasury Department has clarified that eligible credits, as defined under section 6418 of the Internal Revenue Code (the Code), which have not yet been transferred are to be disregarded when conducting the REIT asset tests. This clarification resolves previous uncertainty regarding whether such credits could be considered non-qualifying assets, potentially causing a REIT to fail the asset tests.

2. Transfer of an eligible credit by a REIT is not counted as a sale of property for the REIT prohibited transaction safe harbor

Further clarification from the Treasury Department states that the transfer of an eligible credit will not be considered a sale of property for the prohibited transaction safe harbor. This is significant because one of the safe harbor requirements is that a REIT must not exceed seven property sales within a year. Before this clarification, it was unclear whether transferring an eligible credit would count against this threshold.

3. Neither the receipt nor the right to receive an eligible credit constitutes income for a REIT

The Treasury Department has confirmed in the preamble to the final regulations that neither the receipt of an eligible credit nor the right to receive an eligible credit constitutes income for a REIT. This confirmation is based on the general federal income tax principle that entitlement to a credit against federal income tax does not equate to the receipt of gross income. However, it is important to note that this confirmation applies solely to federal tax credits and does not extend to state and local tax credits.

4. No clear guidance that the sale of energy under sections 45 and 45Y of the Code is not dealer activity

Although the Treasury Department recognized the requests for clear guidance on whether the sale of energy constitutes dealer activity, it did not provide definitive guidance in the final regulations. Instead, the Treasury Department suggests that taxpayers rely on the "net metering" exception outlined in the preamble to the 2016 regulations. Transactions that do not fall within this exception should be evaluated on a case-by-case basis, considering all relevant facts and circumstances. For additional information on the net metering exception and associated tax structuring techniques, please refer to our prior client alert.

Next steps

We encourage REITs to assess the implications of the final regulations in consultation with their REIT tax counsel. Taxpayers may want to discuss the following topics:

• Strategies for installing solar panels to monetize IRA tax credits
• Revisions to REIT property service questionnaires
• Revisions to REIT compliance procedures, and
• Revisions to REIT due diligence processes.

Read more

Access our REIT Tax Resource Center. 

Meet the team

To learn more about DLA Piper’s National REIT Tax practice, please contact any of our REIT tax attorneys. View our team snapshot.

About DLA Piper’s National REIT Tax practice

DLA Piper’s National REIT Tax practice has in-depth knowledge and experience advising US-listed public REITs, Singapore-listed public REITs, non-traded public NAV REITs, mortgage REITs, and private REITs on REIT taxation matters including formation, operation, acquisition, disposition, joint ventures, M&A transactions, restructurings, workouts, and transactions under Chapter XI of the US Bankruptcy Code.

Our attorneys are recognized as industry leaders by Chambers and The Legal 500, regularly publish articles in legal and trade publications, and actively participate in real estate and REIT industry organizations.