Inflation Reduction Act Changes Could Help REITs Get Some Sun

The new credit transfer provision in the Inflation Reduction Act (IRA) could provide a new opportunity for real estate investment trusts (REITs) to invest in properties with solar facilities. The IRA’s extension of the investment tax credit (ITC) for solar energy, along with new credit transferability provisions, could allow REITs to sidestep historical limitations on investments in solar properties and take full advantage of the ITC tax benefits.

REITs have often run into restriction on their ability to benefit from solar ITCs. To qualify for favorable tax treatment, REITs must satisfy certain requirements that limit their non-real estate income and assets, including solar facilities. REITs are also limited in how they can use the ITCs based on a percentage of the REIT’s taxable income.

The IRA’s new credit transfer provision could provide a way for REITs to abide by these restrictions while increasing their solar investments. The transfer provision allows taxpayers to sell their ITCs to an unrelated party in exchange for cash. For REITs, the transfer provides two key benefits:

• The amount received is excluded from the REIT’s gross income under the income test. (Rental properties configured for solar energy may qualify as real property for purposes of the asset test, however.)
• The purchaser is not subject to the REIT’s income limitations.

These changes will allow a REIT to benefit from its ownership of property configured for solar energy and realize the full benefit of the ITC by selling the credit to a third party.

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