Proposed Rules Would Offer REIT Status To Certain Solar Assets

The modified "flow-through" tax treatment afforded to REITs depends on the entity's ability to meet certain asset and income-based tests, all of which in turn key off of the definition of "real estate." On May 9, the IRS and Treasury issued proposed regulations (the "Proposed Regulations") that create a new framework for defining "real property" for purposes of the REIT rules. Although the IRS has stated that the Proposed Regulations represent merely "a clarification of the existing definition of real property," some of the new regulatory examples and illustrations will give comfort with respect to certain assets in the solar renewable energy space.

At a high level, the Proposed Regulations provide that property must be unitized into "distinct assets," and each distinct asset is then tested to determine whether it is real or personal property. Under the standards set forth in the regulations (standards which were already contained in numerous REIT rulings that the