November 12, 2008 | By Keith Martin in Washington, DC

REITS can own solar panels on roofs of buildings and supply electricity to tenants without jeopardizing their status as passthrough entities for tax purposes.

REITs are real estate investment trusts. They are a popular form of entity in the United States for owning buildings and other real estate because they are not subject to income taxes on their earnings.The investors are taxed directly. In order to qualify as a REIT, at least 95% of the gross income the entity earns each year must come from a list of certain types of eligible income and at least 75% must come from a separate and more narrowly-focused list. “Rents from real property” are eligible income for both tests. The IRS told one REIT in a private ruling made public in July that amounts received from its tenants in commercial office buildings for electricity and steam count as part of “rents from real property.”

The REIT had been buying electricity and steam from local utilities and then sub-metering it to calculate how much to charge some tenants and charging other tenants a fixed cost
per square foot. It planned to install generating equipment at each building and hire an outside contractor to operate it. Tenants would be charged for electricity and steam the same way
as before.The IRS had to decide on which side of a line the charges fell.“Rent from real property” includes charges for services that are customarily furnished by landlords. An example is trash collection and cleaning of public spaces. However, it does not include “impermissible tenant service income.” An example is maid service.

The IRS said the electricity and steam charges fall on the good side of the line. It does not matter whether they are broken out separately on bills for rent. The ruling is Private Letter
Ruling 200828025.