United States: Proposed Regulations Provide Greater Certainty On The REIT Classification Of Solar And Other Non-Traditional Assets

The Internal Revenue Service (the "IRS") and Treasury Department have proposed regulations (the "Proposed Regulations") under Section 856 of the Internal Revenue Code providing guidance for analyzing whether non-traditional real estate assets qualify as real estate assets to a real estate investment trust ("REIT"). The Proposed Regulations are a good development for businesses with non-traditional assets that are considering converting into REITs or considering spinning off assets through REITs. There had been some question in 2013 regarding whether the IRS was considering contracting the categories of non-traditional assets that are qualifying real estate assets. The Proposed Regulations provide welcome guidance on the categories of assets that are qualifying real estate assets and provide factors for analyzing other types of assets. The Proposed Regulations also address the REIT classification of solar assets.

Background on REITs

A REIT is an entity with special tax status under Sections 856 through 860 of the Internal Revenue Code. The REIT tax rules were enacted to promote and facilitate widely-held investment in portfolios of real estate. A REIT has a hybrid tax treatment. From an investor's tax perspective, a REIT is a separate taxable entity. An investor in a REIT generally only is taxed on dividends paid by the REIT and on gains on the disposition of shares in the REIT. Tax-exempt and non-US investors also are not directly taxed on the REIT's underlying income. From the entity's tax perspective, the REIT is allowed a "dividends paid deduction" so that it generally does not pay US corporate tax, provided that each year it distributes to its shareholders an amount at least equal to its annual taxable income. In order to qualify as a REIT, among other requirements, (i) at least 75 percent of the REIT's assets must be "real estate assets" (the "asset test"), (ii) at least 75 percent of the REIT's gross income must be from items related to real estate, such as "rents from real property," and (iii) at least 95 percent of the REIT's gross income must be from items related to real estate or certain passive investments. For purposes of the asset test, "real estate assets" include interests in real property, which in turn includes land or improvements thereon, such as buildings or other "inherently permanent structures." The existing regulations generally provide that assets that are affixed to a building or other inherently permanent structures may also qualify as real estate assets, provided they are deemed "structural components" of a building or other inherently permanent structures and are not assets "accessory to the operation of a business." Until now, the qualification of non-traditional assets has been dependent on interpretation of this general standard or IRS published rulings and private letter rulings. However, because much of such authority was private letter rulings, there was some uncertainty as to the proper classification of certain types of non-traditional assets.

Proposed Regulations

The Proposed Regulations, in essence, incorporate into the regulations the body of law that has developed interpreting the existing regulations. The Proposed Regulations follow the same general definitional approach as the existing regulations but provide a step-by-step analysis. Each improvement to land is a distinct asset tested individually to determine whether the asset is a qualifying real estate asset. The Proposed Regulations also replace the concept that an asset can be "accessory to the operation of a business" with a new standard that the asset must serve a "passive function" common to real property rather than an "active function" such as producing, manufacturing or transporting goods or income. Inherently Permanent Structures. Improvements to land are qualifying real estate assets if they are "inherently permanent structures" or "structural components of inherently permanent structures." The Proposed Regulations list the following as inherently permanent structures: microwave transmission, cell, broadcast, and electrical transmission towers, telephone poles, parking facilities, bridges, tunnels, roadbeds, railroad tracks, transmission lines, pipelines, fences, in-ground swimming pools, offshore drilling platforms, storage structures such as silos and oil and gas storage tanks, stationary wharves and docks, and outdoor advertising displays for which an election has been properly made under Section 1033(g)(3) (electing to treat such displays as real property). The Proposed Regulations also provide a general facts and circumstances test (with applicable factors) for analyzing whether other assets that do not serve an active function should be considered to be inherently permanent structures. Structural Components. Structural components are distinct assets that are a constituent part of, and integrated into, an inherently permanent structure. The Proposed Regulations list the following as structural components: wiring, plumbing systems, central heating and air conditioning systems, elevators or escalators, walls, floors, ceilings, permanent coverings of walls, floors and ceilings, windows, doors, insulation, chimneys, fire suppression systems such as sprinkler systems and fire alarms, fire escapes, central refrigeration systems, integrated security systems, and humidity control systems. The Proposed Regulations also provide a general facts and circumstances test (with applicable factors) for analyzing whether other assets that do not serve an active function should be considered to be structural components.

Intangible Assets. The Proposed Regulations also make clear that intangible assets can be real property if the intangible asset derives its value from real property or an interest in real property, is inseparable from that real property or interest in real property, and does not produce or contribute to the production of income other than consideration for the use or occupancy of space. A license, permit, or other similar right to use loan or an inherently permanent structure also may be an interest in real property.

Specific Examples of Qualifying Assets

The Proposed Regulations contain a list of examples, applying the general facts and circumstances test, that conclude that the following types of distinct non-traditional assets, many of which had already been addressed in IRS published rulings and private letter rulings, are qualifying real estate assets:

  • Perennial fruit-bearing plants qualify as land;
  • Boat slips and end ties qualify as land;
  • An indoor sculpture that is essentially permanently affixed and would be costly to remove should be considered an inherently permanent structure under the applicable facts and circumstances test;
  • Custom freezer walls and a centralized refrigeration system of a cold storage warehouse are structural components of inherently permanent structures;
  • Electrical system and telecommunication infrastructure system in a data center are structural components of inherently permanent structures;
  • Pipelines, storage tanks and pipeline transmission systems are inherently permanent structures and structural components of inherently permanent structures.

Solar Assets

The Proposed Regulations also resolve open questions that were not directly addressed in IRS published rulings and private letter rulings. Examples 8 and 9 address the treatment of certain portions of solar energy assets, the classification of which was not entirely certain. Example 8 concludes that the foundations, mounts for photovoltaic ("PV") modules and exit wiring are inherently permanent structures. However, if the power is produced and sold on the grid, the PV modules themselves are not inherently permanent structures or structural components in part because they serve an active function of producing electricity. Example 9, on the other hand, concludes that, if the same solar assets are adjacent to a building and primarily provide power to such building, the assets including the PV modules are structural components of inherently permanent structures. The Proposed Regulations are not effective until finalized. However, in the meantime they provide welcome guidance on the IRS's view as to the qualification of certain non-traditional assets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions