Specific Instructions

Table of Contents

Period Covered

File the 2012 return for calendar year 2012 and fiscal years that begin in 2012 and end in 2013. For a fiscal year return, fill in the tax year in the space at the top of the form.

Note.

The 2012 Form 1120-REIT can also be used if:

  • The REIT has a tax year of less than 12 months that begins and ends in 2013; and

  • The 2013 Form 1120-REIT is not available at the time the REIT is required to file its return.

The REIT must show its 2013 tax year on the 2012 Form 1120-REIT and take into account any tax law changes that are effective for tax years beginning after December 31, 2012.

Name and Address

Enter the REIT's true name (as set forth in the charter or other legal document creating it), address, and EIN on the appropriate lines. Include the suite, room, or other unit number after the street address. Enter the address of the REIT's principal office or place of business. If the Post Office does not deliver mail to the street address and the REIT has a P.O. box, show the box number instead.

Note.

Do not use the address of the registered agent for the state in which the corporation is incorporated. For example, if a business is incorporated in Delaware or Nevada and the corporation's principal office is located in Little Rock, AR, the corporation should enter the Little Rock address.

If the REIT receives its mail in care of a third party (such as an accountant or an attorney), enter on the street address line “C/O” followed by the third party's name and street address or P.O. box.

Item B. 100%-owned Subsidiaries and Personal Holding Companies

REITs with 100%-owned Subsidiaries

Check this box if this return is filed for a REIT with 100%-owned REIT subsidiaries under section 856(i). These subsidiaries are not treated as separate corporations.

Do not check this box for a taxable REIT subsidiary. See the instructions for Taxable REIT Subsidiaries.

Personal Holding Companies

Personal holding companies must attach to Form 1120-REIT a Schedule PH (Form 1120), U.S. Personal Holding Company (PHC) Tax. See the Instructions for Schedule PH (Form 1120) for details.

Item C. Employer Identification Number (EIN)

Enter the REIT's EIN. If the REIT does not have an EIN, it must apply for one. An EIN may be applied for:

  • Online—Visit IRS.gov and click on the EIN link. The EIN is issued immediately once the application information is validated.

  • By telephone at 1-800-829-4933, or at 1-800-829-4059 for individuals who are deaf, hard of hearing, or have a speech disability and have access to TYY/TDD equipment.

  • By faxing or mailing Form SS-4, Application for Employer Identification Number.

If the REIT has not received its EIN by the time the return is due, enter “Applied for” in the space for the EIN. For more details, see the Instructions for Form SS-4.

Note.

Only REITs located in the United States or U.S. possessions can use the online application process.

Item D. Date REIT Established

If the REIT is a corporation under state or local law, enter the date incorporated. If it is a trust or association, enter the date organized.

Item E. Total Assets

Enter the REIT's total assets (as determined by the accounting method regularly used in keeping its books and records) at the end of the tax year. If there are no assets at the end of the tax year, enter -0-.

Item F. Final Return, Name Change, Address Change, or Amended Return

Note.

If a change in address occurs after the return is filed, use Form 8822-B, Change of Address-Business, to notify the IRS of the new address.

  • If this is the REIT's final return, and it will no longer exist, check the “Final return” box. See the instructions for Termination of Election.

  • If the REIT has changed its name since it last filed a return, check the box for “Name change.” Generally, a REIT also must have amended its articles of incorporation and filed the amendment with the state in which it was incorporated.

  • If the REIT has changed its address since it last filed a return (including a change to an “in care of” address), check the box for “Address change.”

  • If the REIT is amending its return, check the box for “Amended Return,” complete the entire return, correct the appropriate lines with the new information, and refigure the REIT's tax liability. Attach a statement that explains the reason for the amendments and identifies the lines being changed on the amended return.

Item G. Type of REIT

Check the appropriate box to indicate whether you are filing a return for a “Mortgage REIT” or an “Equity REIT.” If the primary source of gross receipts is derived from mortgage interest and fees, check the “Mortgage” box. Otherwise, check the “Equity” box.

Item H. PBA Code (Equity REITs Only)

Enter only one code that best reflects the principal business activity of an equity REIT from the selection below:

  • 531110– Lessors of Residential Buildings & Dwellings

  • 531120– Lessors of Nonresidential Buildings (except Miniwarehouses)

  • 531130– Lessors of Miniwarehouses & Self-Storage Units

  • 531190– Lessors of Other Real Estate Property

Part I—Real Estate Investment Trust Taxable Income

Include in Part I the REIT's share of gross income from partnerships in which the REIT is a partner, and the deductions attributable to the gross income items. See Regulations section 1.856-3(g).

Real estate investment trust taxable income does not include the following:

  • Gross income, gains, losses, and deductions from foreclosure property (defined in section 856(e)). If the aggregate of such amounts results in net income, report these amounts in Part II.

  • Income or deductions from any prohibited transaction (defined in section 857(b)(6)) resulting in a gain. Report these amounts in Part IV.

Income

Line 1. Dividends.   Enter the total amount of dividends received during the tax year.

Line 2. Interest.   Enter taxable interest on U.S. obligations and on loans, notes, mortgages, bonds, bank deposits, corporate bonds, tax refunds, etc. Do not offset interest expense against interest income. Special rules apply to interest income from certain below-market-rate loans. See section 7872 for details.

Note.

Report tax-exempt interest income on Form 1120-REIT, Schedule K, item 8. Do not include tax-exempt interest on line 2. Also, if required, include the same amount on Schedule M-1, line 7.

Include interest income from tax credit bonds on line 2.

Line 3. Gross rents.   Include the following:

  • Charges for customary services that may qualify as rents from real property are described in Regulations section 1.856-4(b)(1). Services customarily furnished to tenants of a REIT include parking facilities. See Rev. Rul. 2004-24, 2004-10 I.R.B. 550, for guidance to determine whether amounts received by a REIT that provides parking facilities at its rental real properties qualify as rents from real property.

  • Rent from personal property leased under or with a lease of real property (but only if the rent from the personal property does not exceed 15% of the total rent for the tax year charged for both the real and personal property under such lease). Figure the percentage of rents from personal property by comparing the FMV of the personal rental property to the FMV of the total rental property. See section 856(d)(1) for details.

  • Rent from a taxable REIT subsidiary (TRS) either (a) where at least 90% of the space at issue is leased to third parties at rents comparable to the rent paid by the other tenants of the REIT for comparable space; or (b) for certain lodging facilities or health care property operated by an eligible independent contractor. For more information, including definitions and additional requirements, see sections 856(d)(8) and 856(d)(9). Also, see Rev. Proc. 2003-66, 2003-33 I.R.B. 364 for the special rules on rents paid to a REIT by certain joint ventures that include a TRS.

  See section 856(d)(2) for amounts excluded from “rents from real property.”

Line 4. Other gross rents.   Enter the gross amount received for renting property not included on line 3.

Line 5. Capital gain net income.   Every sale or exchange of a capital asset must be reported on Schedule D (Form 1120), Capital Gains and Losses, even if there is no gain or loss.

Line 7. Other income.   Enter any other taxable income not reported on lines 1 through 6, except amounts that must be reported in Part II or IV. List the type and amount of income on an attached schedule. If the REIT has only one item of other income, describe it in parentheses on line 7. Examples of other income to report on line 7 are:

  • Amounts received or accrued as consideration for entering into agreements to make real property loans or to purchase or lease real property.

  • Recoveries of bad debts deducted in prior years under the specific charge-off method.

  • Refunds of taxes deducted in prior years if they reduced income subject to tax in the year deducted (see section 111). Do not offset current year taxes against tax refunds.

  • Any deduction previously taken under section 179A that is subject to recapture. The REIT must recapture the benefit of any allowable deduction for clean-fuel vehicle property (or clean-fuel vehicle refueling property), if the property later ceases to qualify. See Regulations section 1.179A-1 for details.

  • Ordinary income from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or 1065-B)). Do not offset ordinary losses against ordinary income. Instead, include the losses on line 18, Form 1120-REIT. Show the partnership's name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one partnership, identify the amount from each partnership.

  • Any net positive section 481(a) adjustment. See Section 481(a) adjustment, earlier.

  • Income from discharge of indebtedness for the repurchase of a debt instrument for less than its adjusted issue price. However, for a reacquisition of an applicable debt instrument in 2009 and 2010, a REIT can elect, under section 108(i), to defer the income from discharge of indebtedness in connection with the election. If the REIT makes the election, the income is deferred and ratably included in income over the 5-year period beginning with:

    1. For a reacquisition occurring in 2009, the fifth tax year following the tax year in which the reacquisition occurs, and

    2. For a reacquisition occurring in 2010, the fourth tax year following the tax year in which the reacquisition occurred.

  Once made, the election is irrevocable and the exclusions for COD income under section 108(a)(1)(A), (B), (C), and (D) do not apply for the tax year of the election or any later tax year.

  See Annual information statement for elections made under section 108(i), earlier, for details regarding the annual information statement that is required. For more information, see section 108(i) and Rev. Proc. 2009-37.

Deductions

Limitations on Deductions

Section 263A uniform capitalization rules.   The uniform capitalization rules of section 263A generally require REITs to capitalize certain costs directly or indirectly (including taxes) allocable to real or tangible personal property constructed or improved by the REIT.

  For more details on the uniform capitalization rules, see Regulations sections 1.263A-1 through 1.263A-3. See Regulations section 1.263A-4 for rules for property produced in a farming business.

Transactions between related taxpayers.   Generally, an accrual basis taxpayer may only deduct business expenses and interest owed to a related party in the year the payment is included in the income of the related party. See sections 163(e)(3), 163(j), and 267 for limitations on deductions for unpaid interest and expenses.

  Also see the Instructions for Form 8926, Disqualified Corporate Interest Expense Disallowed Under Section 163(j) and Related Information, with respect to section 163(j).

Golden parachute payments.   A portion of the payments made by a REIT to key personnel that exceeds their usual compensation may not be deductible. This occurs when the REIT has an agreement (golden parachute) with these key employees to pay them these excessive amounts if control of the REIT changes. See section 280G and Regulations section 1.280G-1. Also see the instructions for line 9.

Business start-up and organizational costs.   A REIT can elect to deduct up to $5,000 of business start-up and up to $5,000 of organizational costs paid or incurred after October 22, 2004. Any remaining cost must be amortized. The $5,000 deduction is reduced (but not below zero) by the amount the total costs exceed $50,000. If the total costs are $55,000 or more, the deduction is reduced to zero. See sections 195(b) and 248(a),

Time for making an election.

The REIT generally elects to deduct start-up or organizational costs by claiming the deduction on its income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. However, for start-up or organizational costs paid or incurred before September 9, 2008, the REIT may be required to attach a statement to its return to elect to deduct such costs.

If the REIT timely filed its return for the year without making an election, it can still make an election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on the amended return and write “Filed pursuant to section 301.9100-2” at the top of the amended return. File the amended return at the same address the REIT filed its original return. The election applies when figuring taxable income for the current tax year and all subsequent years.

Note.   The REIT can choose to forgo the elections above by clearly electing to capitalize its start-up or organizational costs on an income tax return filed by the due date (Including extensions) for the tax year in which the active trade or business begins.

Report the deductible amount of such costs and any amortization on line 18. For amortization that begins during the 2012 tax year, complete and attach Form 4562.

For more details on business start-up and organizational costs, see Pub. 535, Business Expenses.

Passive activity limitations.   Limitations on passive activity losses and credits (for the first tax year as a REIT) under section 469 apply to REITs that are closely held (as defined in section 856(h)). REITs subject to the passive activity limitations must complete Form 8810 to compute their allowable passive activity loss and credit. Before completing Form 8810, see Temporary Regulations section 1.163-8T, for rules on allocating interest expense among activities.

Reducing certain expenses for which credits are allowable.   For each credit listed below, the REIT must reduce the otherwise allowable deductions for expenses used to figure the credit by the amount of the current year credit. Do not reduce the amount of the allowable deduction for any portion of the credit that was passed through to the REIT from a pass-through entity on Schedule K-1.

  • Employment credits. See the instructions for line 10.

  • Disabled access credit (Form 8826).

  • Credit for employer for social security and Medicare taxes paid on certain employee tips (Form 8846).

  • Credit for small employer pension plan start-up costs (Form 8881).

  • Credit for employer-provided childcare facilities and services (8882).

  If the REIT is eligible to claim any of these credits, figure each current year credit before figuring the deduction for expenses on which the credit is based. If the REIT capitalized any costs on which it figured the credit, reduce the amount capitalized by the credit attributable to these costs.

  See the instructions for the form used to figure the applicable credit.

Line 9. Compensation of officers.   Enter the deductible officer's compensation on line 9. Do not include compensation deductible elsewhere on the return, such as elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

  If the REIT's total receipts are $500,000 or more, complete and attach Form 1125-E. Total receipts are figured by adding:

  • Line 8, Part I,

  • Net capital gain from line 10, Part III, and

  • Line 9a, Form 2438.

  Enter on line 9 the amount from Form 1125-E, line 4.

Disallowance of deduction for employee compensation in excess of $1 million.

Publicly held REITs cannot deduct compensation to a “covered employee” to the extent that the compensation exceeds $1 million. Generally, a covered employee is:

  • The principal executive officer of the REIT (or an individual acting in that capacity) as of the end of the tax year; or

  • An employee whose total compensation must be reported to shareholders under the Securities Exchange Act of 1934 because the employee is among the three highest compensated officers for that tax year (other than the principal executive officer).

For this purpose, compensation does not include the following:

  • Income from certain employee trusts, annuity plans, or pensions and

  • Any benefit paid to an employee that is excluded from the employee's income.

The deduction limit does not apply to:

  • Commissions based on individual performance,

  • Qualified performance-based compensation, and

  • Income payable under a written, binding contract in effect on February 17, 1993.

The $1-million limit is reduced by amounts disallowed as excess parachute payments under section 280G. See section 162(m) and Regulations section 1.162-27. Also, see Notice 2007-49, 2007-25 I.R.B. 1429.

Line 10. Salaries and wages.   Enter the total salaries and wages paid for the tax year, reduced by the amount claimed on:

  • Form 5884, Work Opportunity Credit;

  • Form 8844, Empowerment Zone Employment Credit;

  • Form 8845, Indian Employment Credit; and

  • Form 8932, Credit for Employer Differential Wage Payments.

  See the instructions for these forms for more information.

  Do not include salaries and wages deductible elsewhere on the return, such as amounts included in officer's compensation, elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

  
If the REIT provided taxable fringe benefits to its employees, such as personal use of a car, do not deduct as wages the amounts allocated for depreciation and other expenses claimed on lines 16 and 18.

Line 11. Repairs and maintenance.   Enter the cost of incidental repairs and maintenance, such as labor and supplies, that do not add to the value of the property or appreciably prolong its life. New buildings, machinery, or permanent improvements that increase the value of the property are not deductible. They must be depreciated or amortized.

Line 12. Bad debts.   Enter the total debts that became worthless in whole or in part during the tax year. A cash basis taxpayer may not claim a bad debt deduction unless the amount was previously included in income.

Line 13. Rents.   If the REIT rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred during the year. Also complete Part V of Form 4562, Depreciation and Amortization. If the REIT leased a vehicle for a term of 30 days or more, the deduction for the vehicle lease expense may have to be reduced by an amount called the inclusion amount.

  The REIT may have an inclusion amount if:  
The lease term began: And the vehicle's FMV on the first day of the lease exceeded:
After 12/31/07 but before 1/1/13 $18,500
After 12/31/06 but before 1/1/08 $15,500
After 12/31/04 but before 1/1/07 $15,200
After 12/31/03 but before 1/1/05 $17,500
If the lease term began before January 1, 2004, see Pub. 463, Travel, Entertainment, Gift, and Car Expenses, to find out if the REIT has an inclusion amount. The inclusion amount for lease terms beginning in 2013 will be published in the Internal Revenue Bulletin in early 2013.

  See Pub. 463 for instructions on figuring the inclusion amount.

Line 14. Taxes and licenses.   Enter taxes paid or incurred during the tax year, but do not include the following:

  • Federal income taxes (except for the tax imposed on net recognized built-in gain allocable to ordinary income).

  • Foreign or U.S. possession income taxes if a tax credit is claimed (however, see the Instructions for Form 5735 for special rules for possession income taxes).

  • Taxes not imposed on the REIT.

  • Taxes, including state or local sales taxes, that are paid or incurred in connection with an acquisition or disposition of property (these taxes must be treated as a part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition).

  • Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).

  • Taxes deducted elsewhere on the return.

  • Excise taxes imposed under section 4981 on undistributed REIT income.

  See section 164(d) for information on apportionment of taxes on real property between seller and purchaser.

Line 15. Interest.   
Interest expense cannot be used to offset interest income.

  The deduction for interest is limited when the REIT is a policyholder or beneficiary with respect to a life insurance, endowment, or annuity contract issued after June 8, 1997. For details, see section 264(f). Attach a statement showing the computation of the deduction.

  The REIT must make an interest allocation if the proceeds of a loan were used for more than one purpose. For example, the loan proceeds were used to purchase a financial investment and acquire an interest in a passive activity. See Temporary Regulations section 1.163-8T for the interest allocation rules.

  The following interest is not deductible:

  • Interest on indebtedness incurred or continued to purchase or carry obligations if the interest is wholly exempt from income tax. See section 265(b) for special rules and exceptions for financial institutions. Also see section 265(b)(7) for a temporary de minimis safe-harbor exception for certain financial institutions for tax-exempt bonds issued in 2010 and 2011.

  • For cash basis taxpayers, prepaid interest allocable to years following the current tax year (for example, a cash basis calendar year taxpayer who in 2012 prepaid interest allocable to any period after 2012 can deduct only the amount allocable to 2012).

  • Interest and carrying charges on straddles. Generally, these amounts must be capitalized. See section 263(g).

  • Interest paid or incurred on any portion of an underpayment of tax that is attributable to an understatement arising from an undisclosed listed transaction or an undisclosed reportable avoidance transaction (other than a listed transaction) entered into in tax years beginning after October 22, 2004.

   Special rules apply to:

  • Disqualified interest on certain indebtedness under section 163(j). See Form 8926, Disqualified Corporate Interest Expense Disallowed Under Section 163(j) and Related Information, and the related instructions;

  • Interest on which no tax is imposed (see section 163(j));

  • Foregone interest on certain below-market-rate loans (see section 7872);

  • Original issue discount (OID) on certain high-yield discount obligations. See section 163(e)(5) to determine the amount of the deduction for OID that is deferred and the amount that is disallowed on a high-yield discount obligation. The rules under section 163(e)(5) do not apply to certain high-yield discount obligations issued after August 31, 2008 and before January 1, 2011. See section 163(e)(5)(F). Also, see Notice 2010-11, 2010-4 I.R.B. 326; and

  • Section 108(i) OID deduction. If the REIT issued a debt instrument with original issue discount (OID) that is subject to section 108(i)(2) because of an election under section 108(i) to defer the recognition of income from the cancellation of debt (COD), the deduction for all or a portion of the OID that accrues prior to the first tax year the COD is includible in income is deferred until the COD is includible in income. The aggregate amount of OID that is deferred during this period is generally allowed as a deduction ratably over the 5-year period the COD is includible in income under section 108(i). The amount deferred is limited to the amount of COD subject to the section 108(i) election. See section 108(i) for more details. An annual information statement (discussed earlier) is required if the election under section 108(i) is made.

Line 16. Depreciation.   Include on line 16 depreciation and the cost of certain property that the REIT elected to expense under section 179. See Form 4562 and the related instructions to figure the amount to enter on this line.

Line 18. Other deductions.   
Penalties or fines paid to any government agency or instrumentality because of a violation of a law are not deductible. See Publication 535, Business Expenses, for additional information.

  Attach a statement, listing by type and amount, all allowable deductions that are not deductible elsewhere on the return. Enter the total on line 18. Include amortization and organization expenses. Generally, a deduction may not be taken for any amount that is allocable to a class of exempt income. See section 265(b) for exceptions.

  Examples of other deductions include:

  • Amortization (see Form 4562).

  • Certain business start-up and organizational costs that the REIT elects to deduct.

  • Depletion. Attach Form T (Timber), Forest Activities Schedule, if a deduction for depletion of timber is taken.

  • Reforestation costs. The REIT can elect to deduct up to $10,000 of qualified reforestation expenses, for each qualifying timber property. The REIT can elect to amortize over 84 months any amount not deducted.

  • Insurance premiums.

  • Legal and professional fees.

  • Supplies used and consumed in the business.

  • Utilities.

  • Ordinary losses from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or 1065-B)). Do not offset ordinary income against ordinary losses. Instead, include the income on line 7. Show the partnership's name, address, and EIN on a separate statement attached to this return. If the amount is from more than one partnership, identify the amount from each partnership.

  • Any negative section 481(a) adjustment. See Section 481 (a) adjustment, earlier.

  • Deduction for certain energy efficient commercial building property placed in service during the year. See section 179D. Also, see Notice 2006-52, 2006-26 I.R.B. 1175, as amplified and clarified by Notice 2008-40, 2008-14 I.R.B. 725, and as modified by Notice 2012-26, 2012-17 I.R.B. 847.

Charitable contributions.   Enter contributions or gifts actually paid within the tax year to or for the use of charitable and governmental organizations described in section 170(c) and any unused contributions carried over from prior years.

  REITs reporting taxable income on the accrual method may elect to treat as paid during the tax year any deductible contributions paid by the 15th day of the 3rd month after the end of the tax year if the contributions were authorized by the board of directors during the tax year. Attach a declaration to the return stating that the resolution authorizing the contributions was adopted by the board of directors during the tax year. The declaration must include the date the resolution was adopted.

Limitation on deduction.

The total amount claimed may not be more than 10% of taxable income (the sum of Part I, line 22; Part II, line 5; Part IV, line 3; and Form 2438, line 11) computed without regard to the following:

  • Any deduction for contributions.

  • The domestic production activities deduction under section 199.

  • The limitation under section 249 on the deduction for bond premium.

  • Any net operating loss (NOL) carryback to the tax year under section 172.

  • Any capital loss carryback to the tax year under section 1212(a)(1).

Carryover.

Charitable contributions that exceed the 10% limitation cannot be deducted for the tax year but may be carried over to the next 5 tax years.

Special rules apply if the REIT has an NOL carryover to the tax year. In figuring the charitable contributions deduction for the tax year, the 10% limit is applied using the taxable income after taking into account any deduction for the NOL.

To figure the amount of any remaining NOL carryover to later years, taxable income must be modified (see section 172(b)). To the extent that contributions are used to reduce taxable income for this purpose and increase an NOL carryover, a contributions carryover is not allowed. See section 170(d)(2)(B).

Cash contributions.

For contributions of cash, check, or other monetary gifts (regardless of the amount), the REIT must maintain a bank record, or a receipt, letter, or other written communication from the donee organization indicating the name of the organization, the date of the contribution, and the amount of the contribution.

Contributions of $250 or more.

A REIT can deduct a contribution of $250 or more only if the REIT receives a written acknowledgment from the donee organization that shows the amount of cash contributed, describes any property contributed, and gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. The acknowledgment must be obtained by the due date (including extensions) of the REIT's return, or, if earlier, the date the return is filed. Do not attach the acknowledgment to the tax return, but keep it with the REIT's records. These rules apply in addition to the filing requirements for Form 8283, Noncash Charitable Contributions.

  Special rules and limits apply to:

  • Contributions to organizations conducting lobbying activities. See section 170(f)(9).

  • Contributions of property other than cash. See Form 8283.

  • Contributions of computer technology and equipment for educational purposes. See section 170(e)(6).

  For more information on charitable contributions, including substantiation and recordkeeping requirements, see section 170 and the related regulations and Pub. 526, Charitable Contributions. For special rules that apply to corporations, see Pub. 542.

Pension, profit-sharing, etc., plans.   Include the deduction for contributions to qualified pension, profit-sharing, or other funded deferred compensation plans. Employers who maintain such a plan generally must file one of the forms listed below unless exempt from filing under regulations or other applicable guidance, even if the plan is not a qualified plan under the Internal Revenue Code. The filing requirement applies even if the REIT does not claim a deduction for the current tax year. There are penalties for failure to file these forms on time and for overstating the pension plan deduction. See sections 6652(e) and 6662(f). Also see the instructions for the applicable forms.

Form 5500,

Annual Return/Report of Employee Benefit Plan.

Form 5500-SF,

Short Form Annual Return/Report of Small Employee Benefit Plan, instead of Form 5500, generally if under 100 participants at the beginning of the plan year.

Note.

Form 5500 and Form 5500-SF must be filed electronically under the computerized ERISA Filing Acceptance System (EFAST2). For more information, see the EFAST2 website at www.efast.dol.gov.

Form 5500-EZ,

Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan. File this form for a plan that only covers the owner (or the owner and his or her spouse) but only if the owner (or the owner and his or her spouse) owns the entire business.

Travel, meals, and entertainment.    Subject to limitations and restrictions discussed below, a REIT can deduct ordinary and necessary travel, meals, and entertainment expenses paid or incurred in its trade or business. Also, special rules apply to deductions for gifts, skybox rentals, luxury water travel, convention expenses, and entertainment tickets. See section 274 and Pub. 463 for more details.

Travel.

A REIT cannot deduct travel expenses of any individual accompanying a corporate officer or employee, including a spouse or dependent of the officer or employee, unless:

  • That individual is an employee of the REIT, and

  • His or her travel is for a bona fide business purpose and would otherwise be deductible by that individual.

Meals and entertainment.

Generally, the REIT can deduct only 50% of the amount otherwise allowable for meals and entertainment expenses paid or incurred in its trade or business. In addition (subject to exceptions under section 274(k)(2)):

  • Meals must not be lavish or extravagant;

  • A bona fide business discussion must occur during, immediately before, or immediately after the meal; and

  • An employee of the REIT must be present at the meal.

See section 274(n)(3) for a special rule that applies to expenses for meals consumed by individuals subject to the hours of service limits of the Department of Transportation.

Membership dues.

The REIT can deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. However, no deduction is allowed if a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or their guests. In addition, a REIT cannot deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.

Entertainment facilities.

The REIT cannot deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity usually considered entertainment, amusement, or recreation.

Amounts treated as compensation.

Generally, the REIT may be able to deduct otherwise nondeductible meals, travel, and entertainment expenses if the amounts are treated as compensation to the recipient and reported on Form W-2 for an employee or on Form 1099-MISC for an independent contractor.

However, if the recipient is an officer, director, or beneficial owner (directly or indirectly) of more than 10% of any class of stock, the deduction is limited. See section 274(e)(2) and Notice 2005-45, 2005-24 I.R.B. 1228. For tax years beginning after August 1, 2012, see Regulations sections 1.274-9 and 1.274-10.

Lobbying expenses.   Generally, lobbying expenses are not deductible. These expenses include:

  • Amounts paid or incurred in connection with influencing federal or state legislation (but not local legislation); or

  • Amounts paid or incurred in connection with any communication with certain federal executive branch officials in an attempt to influence the official actions or positions of the officials. See Regulations section 1.162-29 for the definition of “influencing legislation.”

   Dues and other similar amounts paid to certain tax-exempt organizations may not be deductible. See section 162(e)(3). If certain in-house lobbying expenditures do not exceed $2,000, they are deductible. For information on contributions to charitable organizations that conduct lobbying activities, see section 170(f)(9).

  For more information on other deductions that may apply to corporations, see Pub. 535.

Line 20. Taxable income before NOL deduction, total deduction for dividends paid, and section 857(b)(2)(E) deduction.    
Generally, special at-risk rules under section 465 apply to closely held corporations engaged in any activity as a trade or business or for the production of income. Those REITs that are closely held may have to adjust the amount on line 20.

  The at-risk rules do not apply to:

  • Holding real property placed in service by the taxpayer before 1987;

  • Equipment leasing under sections 465(c)(4), (5), and (6); or

  • Any qualifying business of a qualified REIT under section 465(c)(7).

  However, the at-risk rules do apply to the holding of mineral property.

  If the at-risk rules apply, adjust the amount on this line for any section 465(d) losses. These losses are limited to the amount for which the REIT is at risk for each separate activity at the close of the tax year. If the REIT is involved in one or more activities, any of which incurs a loss for the year, report the losses for each activity separately. Attach Form 6198, At-Risk Limitations, showing the amount at risk and gross income and deductions for the activities with the losses.

  If the REIT sells or otherwise disposes of an asset or its interest (either total or partial) in an activity to which the at-risk rules apply, determine the net profit or loss from the activity by combining the gain or loss on the sale or disposition with the profit or loss from the activity. If the REIT has a net loss, it may be limited because of the at-risk rules.

  Treat any loss from an activity not allowed for the tax year as a deduction allocable to the activity in the next tax year.

Line 21a. Net operating loss deduction.   A REIT can use the net operating loss (NOL) incurred in one tax year to reduce its taxable income in another tax year.

  Generally, a REIT may carry an NOL over to each of the 20 years (15 years for NOLs incurred in tax years beginning before August 6, 1997) following the year of loss. REITs are not permitted to carry back an NOL to any year preceding the year of the loss. In addition, an NOL from a year that is not a REIT year may not be carried back to any year that is a REIT year.

  Enter the total NOL carryovers from other tax years, but do not enter more than the REIT's taxable income. The REIT's taxable income for purposes of the NOL deduction is taxable income (line 20) reduced by the dividends paid deduction (line 21b) and the section 857(b)(2)(E) deduction (line 21c). If this amount is less than zero, an NOL deduction cannot be taken for the tax year. Attach a statement showing the computation of the NOL deduction. Also complete item 9 on Schedule K.

  If capital gain dividends are paid during any tax year, the amount of the net capital gain for such tax year (to the extent of the capital gain dividends) is excluded in determining:

  1. The NOL for the tax year; and

  2. The amount of the NOL of any prior tax year that may be carried over to any succeeding tax year.

Carryover rules.

The NOL for the current year is computed using the REIT's taxable income before it is reduced by the dividends paid deduction. After the REIT applies the NOL to the first tax year to which it may be carried, the taxable income of that year must be modified (as described by section 172(b) and the modified rules for REITs in section 172(d)(6)) to determine how much of the remaining loss may be carried to other years. Although the current year NOL is computed without regard to the dividends paid deduction, an NOL carryover from a prior year is applied to the current year using taxable income after it is reduced by the dividends paid deduction. The NOL amounts carried forward by the REIT are not reduced by subsequent year dividends paid deductions. See Example 1 in Regulations section 1.172-5(a)(4).

Special NOL rules apply when:

  • An ownership change (described in section 382(g)) occurs, the amount of the taxable income of a loss REIT that may be offset by the pre-change NOL carryovers is limited (see section 382 and the related regulations). A loss REIT must file an information statement with its income tax return for each tax year that certain ownership shifts occur (see Temporary Regulations section 1.382-2T(a)(2)(ii) for details). See Regulations section 1.382-6(b) for details on how to make the closing-of-the-books election.

  • A REIT acquires control of another REIT (or acquires its assets in a reorganization), the amount of pre-acquisition losses that may offset recognized built-in gains is limited (see section 384).

Tax and Payments

Line 24b. Estimated tax payments.   Enter any estimated tax payments the REIT made for the tax year.

Line 24f(1).   Enter the credit (from Form 2439) for the REIT's share of the tax paid by a regulated investment company (RIC) or another REIT on undistributed long-term capital gains included in the REIT's income. Attach Form 2439 to Form 1120-REIT.

Line 24f(2).   Enter the credit from Form 4136, Credit for Federal Tax Paid on Fuels, if the REIT qualifies to claim this credit. Attach Form 4136 to Form 1120-REIT.

Line 24g. Refundable Credit From Form 8827.   If the REIT elected to claim certain unused minimum tax credits instead of claiming any additional first-year special depreciation allowance for eligible property, see the instructions for Form 8827. Enter on line 24g the amount from line 8c of Form 8827, if applicable. See the instructions for these forms for more information.

  
The REIT must use the refundable credit from Form 8827 to reduce any built-in gains tax derived from property that it owned when it was a C corporation, before the credit can be used to reduce the REIT's income tax. See the instructions for line h of the Built-in Gains Tax Worksheet Instructions later.

Line 24h.   Add the amounts on lines 24d through 24g and enter the total on line 24h.

Backup withholding.   If the REIT had income tax withheld from any payments it received because, for example, it failed to give the payer its correct EIN, include the amount withheld in the total for line 24h. Enter the amount withheld and the words “Backup Withholding.” in the blank space above line 24h.

Line 25. Estimated tax penalty.   A REIT that does not make estimated tax payments when due may be subject to an underpayment penalty for the period of underpayment. Generally, a REIT is subject to the penalty if its tax liability is $500 or more and it did not timely pay the smaller of:

  • Its alternative minimum tax minus the credit for federal tax paid on fuels for 2012 as shown on the return or

  • Its prior year's tax (computed in the same manner). See section 6655 for details and exceptions, including special rules for large corporations.

  Use Form 2220, Underpayment of Estimated Tax by Corporations, to determine whether the REIT owes a penalty and to figure the amount of the penalty. Generally, the REIT does not have to file this form because the IRS can figure the amount of any penalty and bill the REIT for it. However, even if it does not owe the penalty, the REIT must complete and attach Form 2220 if the annualized income or adjusted seasonal installment method is used, or the REIT is a large corporation computing its first required installment based on the prior year's tax. See the Instructions for Form 2220 for the definition of a “large corporation.”

  If Form 2220 is attached, check the box on this line and enter the amount of any penalty.

Part II—Tax on Net Income From Foreclosure Property

Complete Part II only if the gross income, gains, losses, and deductions from foreclosure property (defined in section 856(e)) result in net income. If an overall net loss results, report the gross income, gains, losses, and deductions from foreclosure property on the appropriate lines of Part I.

Property may be treated as foreclosure property only if it meets the requirements of section 856(e) and the REIT elects to treat the property as foreclosure property in the year it was acquired. The property continues to be foreclosure property until the close of the 3rd tax year following the tax year in which the REIT acquired it. For more information, see section 856(e).

However, if the foreclosure property is qualified health care property, it will cease to be foreclosure property as of the close of the 2nd year following the tax year the REIT acquired it (although the REIT may request one or more extensions to this 2-year grace period not to extend beyond the 6th year). See section 856(e)(6) for details.

This election must be made by the due date for filing Form 1120-REIT (including extensions). To make the election, attach a statement that:

  • Indicates that the election under section 856(e) is being made;

  • Identifies the property to which the election applies;

  • Includes the name, address, and EIN of the REIT, the date the property was acquired, and a brief description of how the property was acquired (including the name of the person from whom the property was acquired); and

  • Gives a description of the lease or debt with respect to which default occurred or was imminent.

The REIT can revoke the election by filing a revocation on or before the due date (including extensions) for filing Form 1120-REIT. See section 856(e) for more details.

Line 2. Gross income from foreclosure property.   Do not include income that qualifies under the REIT's 75% gross income test under section 856(c)(3)(A), (B), (C), (D), (E), or (G). These amounts must be reported in Part I.

Line 4. Deductions.   Deduct only those expenses that have a proximate and primary relationship to earning the income shown on line 3. This includes:

  • Depreciation on foreclosure property;

  • Interest paid or accrued on debt of the REIT that is attributable to the carrying of the property;

  • Real estate taxes; and

  • Fees charged by an independent contractor to manage such property.

  Do not deduct general overhead and administrative expenses in Part II.

Part III—Tax for Failure To Meet Certain Source-of-Income Requirements

Section 856(c)(6) provides REITs with a relief provision if they have failed to satisfy the source-of-income requirements of sections 856(c)(2) and 856(c)(3). If section 856(c)(6) applies to a REIT for any taxable year, a tax is imposed on the REIT under section 857(b)(5).

All REITs must complete lines 1a through 8 of Part III to determine whether they are subject to the tax imposed under section 857(b)(5). If line 8 is zero, the tax does not apply, and the REIT does not have to complete the rest of Part III. However, if line 8 is greater than zero, the REIT is subject to this tax, and must complete the rest of Part III to determine the amount of tax.

A REIT that has failed the source-of-income requirements of sections 856(c)(2) and 856(c)(3) may avoid loss of its REIT status as a result of the failure if, following identification of its failure to meet the source-of-income requirements, the REIT sets forth a description of each item of its gross income described in sections 856(c)(2) and 856(c)(3) in an attached schedule. In addition, its failure to meet the source-of-income requirements must be due to reasonable cause and not due to willful neglect.

For information on the relief provisions under sections 856(c)(7) and 856(g)(5), see the Instructions for Schedule J, line 2f.

Part IV—Tax on Net Income From Prohibited Transactions

Section 857(b)(6) imposes a tax equal to 100% of the net income derived from prohibited transactions. The 100% tax is imposed to prevent a REIT from retaining any profit from ordinary retailing activities such as sales to customers of condominium units or subdivided lots in a development tract.

Line 1. Gain from sale or other disposition of property.   Include only gain from the sale or other disposition of property described in section 1221(a)(1) that is not foreclosure property and that does not qualify as an exception. See section 857(b)(6)(C) for information on certain sales that do not qualify as prohibited transactions. See section 856(j) for a special rule regarding a shared appreciation mortgage. Exceptions apply for certain sales of timber property by a timber REIT. See section 857(b)(6)(D).

  Do not net losses from prohibited transactions against gains in determining the amount to enter on line 1. Enter losses from prohibited transactions on the appropriate line in Part I.

Line 2. Deductions.   Deduct only those expenses that have a proximate and primary relationship to the earning of the income shown on line 1. Do not deduct general overhead and administrative expenses in Part IV.

Schedule A—Deduction for Dividends Paid

Lines 1 through 5.   Section 561 (taking into account sections 857(b)(8), 857(d)(3)(B), and 858(a)) determines the deduction for dividends paid.

Line 3.   Dividends declared in October, November, or December and payable to shareholders of record in October, November, or December are treated by the REIT as paid on December 31 of that calendar year. The REIT is then eligible for the deduction for dividends paid for the year the dividends are declared even though they are not actually paid until January of the following calendar year.

  If the REIT declared dividends in any of those months and actually paid them in January, as discussed above, enter on line 3 those dividends not already included on lines 1, 2, and 4 of Schedule A.

Line 7.   If, for any tax year the REIT has net income from foreclosure property (as defined in section 857(b)(4)(B)), the deduction for dividends paid to be entered on line 6 (and on line 21b, page 1) is determined by multiplying the amount on line 5 by the following fraction: 

  
  REIT taxable income (determined without regard to the deduction for dividends paid)
  REIT taxable income (determined without regard to the deduction for dividends paid) + 
(Net income from foreclosure property minus the tax on net income from foreclosure property)

Schedule J—Tax Computation

Line 1

A member of a controlled group must check the box on line 1 and complete and attach Schedule O (Form 1120). See Schedule O (Form 1120) and its instructions for more information.

Line 2a–Tax on REIT Taxable Income

Most REITs figure their tax by using the Tax Rate Schedule below. A member of a controlled group must use Schedule O (Form 1120) to figure its tax.

Tax Rate Schedule

If taxable income (line 22, page 1) is:
Over— But not over— Tax is: Of the amount over—
$0 $50,000 15% $0
50,000 75,000 $ 7,500 + 25% 50,000
75,000 100,000 13,750 + 34% 75,000
100,000 335,000 22,250 + 39% 100,000
335,000 10,000,000 113,900 + 34% 335,000
10,000,000 15,000,000 3,400,000 + 35% 10,000,000
15,000,000 18,333,333 5,150,000 + 38% 15,000,000
18,333,333 - - - - - 35% 0

Line 2c

Taxes are imposed for the failure to meet the requirements of the asset test and/ or gross income test. To qualify for relief from the failure to meet these requirements, attach an explanation of why the REIT failed to meet the asset test and/ or gross income test. Attach supporting schedules and a statement showing the computation of the amount of tax. Also, include a reason why the failure was due to reasonable cause and not willful neglect. See sections 856(c)(2), 856(c)(3), and 856(c)(4).

The statement for reasonable cause should be attached to Form 1120-REIT at the time it is filed.

Line 2e

Enter the amount of the 100% REIT tax imposed on the following:

  • Income of a REIT for services provided to the REIT's tenants that is improperly included in rents from real property reported by the REIT instead of being reported by the TRS;

  • Deductions that are improperly allocated between the REIT to its TRS; and

  • Interest deductions of a TRS to the extent that interest payments to its REIT are in excess of a rate that is commercially reasonable.

See section 857(b)(7) for details and exceptions.

Line 2f–Taxes Imposed Under Section 856(c)(7) and Section 856(g)(5)

Enter the taxes imposed for the following relief provisions:

  • Section 856(c)(7) relating to failures to meet the requirements of the asset test of section 856(c)(4); and

  • Section 856(g)(5) relating to failures to meet certain requirements under sections 856 through 859 (other than sections 856(c)(2), 856(c)(3), and 856(c)(4)).

See section 856(c)(7) and 856(g)(5) for detailed information on the requirements for these relief provisions and check the appropriate box(es) for the tax(es) imposed under them.

Failures to meet the asset test requirements of section 856(c)(4) (other than de minimus failures).   Under section 856(c)(7)(A), a REIT may avoid loss of its REIT status as a result of certain failures to meet the asset test requirements of section 856(c)(4) if, following identification of the failure, each of the following requirements are met:

  • The REIT sets forth a description of each asset that causes the REIT to fail to satisfy the requirements of the asset test at the close of a quarter in a statement for the quarter attached to its timely filed Form 1120-REIT;

  • The failure must be due to reasonable cause and not due to willful neglect; and

  • The REIT either: (a) disposes of the assets shown on the specified statement within 6 months after the last day of the quarter in which the REIT's identification of the failure occurred (or such other time and in the manner prescribed by regulations); or (b) the requirements of the asset test of section 856(c)(4) are otherwise met within the specified time period.

  In addition, if section 856(c)(7)(A) applies to a REIT for any tax year, the REIT must pay a tax which is the greater of:

  • $50,000 or

  • the amount determined (as prescribed by regulations to be promulgated by the Secretary) by multiplying the net income generated by the assets described in the specified schedule for the quarter in which the failure occurred by 35% (the highest corporate tax rate).

Note.

There is no tax imposed and you are not required to attach a schedule of assets to Form 1120-REIT for the de minimus relief provision under section 856(c)(7)(B).

Under section 856(c)(7)(B), a REIT may avoid loss of its REIT status as a result of certain failures to meet the asset test requirements of section 856(c)(4)(B)(iii) if:

  • Following its identification of the failure, the REIT disposes of assets within 6 months after the last day of the quarter in which the REIT's identification of the failure occurred (or such time period prescribed by the Secretary and in the manner prescribed by the Secretary), or

  • The requirements of the asset test of section 856(c)(4) are otherwise met within the specified time period.

Certain REIT qualification failures of sections 856–859 (other than sections 856(c)(2), 856(c)(3) and 856(c)(4)).   Under section 856(g)(5), a REIT that fails to meet the REIT qualification requirements under sections 856–859, except for section 856(c)(2), 856(c)(3), and 856(c)(4), may avoid loss of its REIT status if the failure is due to reasonable cause and not due to willful neglect. In addition, the REIT must pay (as prescribed by regulations and in the same manner as tax) a penalty of $50,000 for each failure to satisfy a provision of sections 856–859. See section 856(g)(5).

Line 2g–Alternative Minimum Tax (AMT)

Unless the REIT is treated as a small corporation exempt from the AMT, it may owe the AMT if it has any of the adjustments and tax preference items listed on Form 4626, Alternative Minimum Tax–Corporations. The REIT must file Form 4626 if its taxable income (loss) combined with these adjustments and tax preference items is more than the smaller of:

  • $40,000 or

  • The REIT's allowable exemption amount (from Form 4626).

For this purpose, taxable income does not include the NOL deduction. See Form 4626 for details.

Exemption for small corporations.

A REIT is treated as a small corporation exempt from the AMT for its tax year beginning in 2012 if that year is the REIT's first tax year in existence (regardless of its gross receipts) or:

  1. It was treated as a small corporation exempt from the AMT for all prior tax years beginning after 1997 and

  2. Its average annual gross receipts for the 3-year tax period (or portion thereof during which the REIT was in existence) ending before its tax year beginning in 2012 did not exceed $7.5 million ($5 million if the REIT had only 1 prior tax year).

For more details, see the Instructions for Form 4626.

Line 2h–Income Tax

Deferred tax under section 1291.   If the REIT was a shareholder in a passive foreign investment company (PFIC) and received an excess distribution or disposed of its investment in the PFIC during the year, it must include the increase in taxes due under section 1291(c)(2) in the total for line 2h. On the dotted line to the left of line 2h, enter “Section 1291” and the amount.

  Do not include on line 2h any interest due under section 1291(c)(3). Instead, show the amount of interest owed in the bottom margin of page 1, Form 1120-REIT, and enter “Section 1291 interest.” For details, see Form 8621.

Additional tax under section 197(f).   A corporation that elects to pay tax on the gain from the sale of an intangible under the related person exception to the anti-churning rules should include any additional tax due under section 197(f)(9)(B) in the total for line 2h. On the dotted line next to line 2h, enter “Section 197” and the amount. For more information, see Pub. 535.

Line 3a–Foreign Tax Credit

To find out when a REIT can claim the foreign tax credit for payment of income tax to a foreign country or U.S. possession, see Form 1118, Foreign Tax Credit–Corporations.

Line 3b–Credit from Form 8834, line 30

Enter any qualified electric vehicle passive activity credits from prior years allowed for the current tax year from Form 8834, Qualified Plug-In Electric and Electric Vehicle Credit, line 30.

Line 3c–General Business Credit

The REIT is required to file Form 3800, General Business Credit, to claim most business credits. For a list of allowable credits, see Form 3800. Enter the allowable credit from Part II, line 38, of Form 3800, on line 3c. Also, see the applicable credit form and its instructions. See Form 3800 for a complete listing of general business credits.

Line 3d–Other credits

Include any allowable credits not reported above, such as the Credit for Prior Year Minimum Tax–Corporations (Form 8827). Attach a statement that identifies the type and amount for each credit. Attach the applicable credit form to the return.

Bond credits from Form 8912.   Enter the allowable credits from Form 8912, Credit to Holders of Tax Credit Bonds, line 18.

Line 5–Personal Holding Company Tax

A REIT is taxed as a personal holding company under section 542 if:

  • At least 60% of its adjusted ordinary gross income for the tax year is personal holding company income, and

  • At any time during the last half of the tax year more than 50% in value of its outstanding stock is owned, directly or indirectly, by five or fewer individuals.

See Schedule PH (Form 1120), U.S. Personal Holding Company (PHC) Tax, for definitions and details on how to figure the tax.

Line 6–Other Taxes

Include any of the following taxes and interest in the total on line 7. Check the appropriate box(es) for the form, if any, used to compute the total.

Recapture of investment credit.   If the REIT disposed of investment credit property or changed its use before the end of its useful life or recovery period, it may owe a tax. See Form 4255, Recapture of Investment Credit, for details.

Recapture of low-income housing credit.   If the REIT disposed of property (or there was a reduction in the qualified basis of the property) for which it took the low-income housing credit, it may owe a tax. See Form 8611, Recapture of Low-Income Housing Credit.

Interest due under the look-back methods.   If the REIT used the look-back method for certain long-term contracts, see Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, for information on figuring the interest the REIT may have to include.

  The REIT may also have to include interest due under the look-back method for property depreciated under the income forecast method. See Form 8866, Interest Computation Under the Look-Back Method for Property Depreciated Under the Income Forecast Method.

Other.    Additional taxes and interest amounts can be included in the total entered on line 7. Check the box for “Other” if the REIT includes any of the taxes and interest discussed below. See How to report, for the line 7 instructions for details on reporting these amounts on an attached schedule.

  1. Recapture of qualified electric vehicle (QEV) credit. The REIT must recapture part of the QEV credit it claimed in a prior year if, within 3 years of the date the vehicle was placed in service, it ceases to qualify for the credit. See Regulations section 1.30-1 for details on how to figure the recapture.

  2. Recapture of Indian employment credit. Generally, if an employer terminates the employment of a qualified employee less than 1 year after the date of initial employment, any Indian employment credit allowed for a prior tax year because of wages paid or incurred to that employee must be recaptured. For details, see Form 8845 and section 45A.

  3. Recapture of new markets credit (see Form 8874).

  4. Recapture of employer-provided childcare facilities and services credit (see Form 8882).

  5. Interest due on deferred tax attributable to (a) installment sales of certain timeshares and residential lots (section 453(l)(3)) and (b) certain nondealer installment obligations (section 453A(c)).

  6. Interest due on deferred gain (section 1260(b)).

Built-in Gains Tax

If, on or after January 2, 2002, property of a C corporation becomes property of a REIT by either: (a) the qualification of the C corporation as a REIT; or (b) the transfer of such property to a REIT, then the REIT will be subject to the built-in gains tax under section 1374 unless the C corporation elects deemed sale treatment on the transferred property. If the C corporation does not make this election for tax years beginning in 2012 or 2013, the REIT must pay tax on the net recognized built-in gain during the 5-year period beginning on its first day as a REIT or the day it acquired the property.

Recognized built-in gains and losses generally retain their character (for example, ordinary income or capital gain) and are treated the same as other gains or losses of the REIT. The REIT's tax on net recognized built-in gain is treated as a loss incurred by the REIT during the same tax year (see the instructions for line i of the Built-in Gains Tax Worksheet, later). See Regulations section 1.337(d)-7 for details.

Different rules apply to elections to be a REIT and transfers of property in a carryover basis transaction that occurred prior to January 2, 2002. For REIT elections and property transfers before this date, the C corporation is subject to deemed sale treatment on the transferred property unless the REIT elects section 1374 treatment. See Regulations section 1.337(d)-6 for information on how to make the election and figure the tax for REIT elections and property transfers before this date. The REIT may also rely on Regulations section 1.337(d)-5 for REIT elections and property transfers that occurred before January 2, 2002.

Built-in Gains Tax Worksheet instructions

Complete the worksheet on the next page to figure the built-in gains tax under Regulations section 1.337(d)-7 or 1.337(d)-6.

Line a.   Enter the amount that would be the taxable income of the REIT for the tax year if only recognized built-in gain, recognized built-in loss, and recognized built-in gain carryover were taken into account, reduced by any portion of the REIT's recognized built-in gain from:

  • Net income from foreclosure property,

  • Amounts subject to tax for failure to meet certain source-of-income requirements under section 857(b)(5) computed in accordance with Regulations section 1.337(d)-6(c)(2),

  • Net income from prohibited transactions under section 857(b)(6), and

  • Amounts subject to tax under section 857(b)(7).

Line b.   Add the amounts shown on:

  • Form 1120-REIT, page 1, line 20;

  • Form 1120-REIT, Part II, line 5; and

  • Form 2438, line 11.

Subtract from the total the amount on Form 1120-REIT, line 21c. Enter the result on line b of the Built-in Gains Tax Worksheet on the next page.

Line c.   The REIT's net unrealized built-in gain is the amount, if any, by which the fair market value of the assets of the REIT at the beginning of its first REIT year (or as of the date the assets were acquired, for any asset with a basis determined by reference to its basis (or the basis of any other property) in the hands of a C corporation) exceeds the aggregate adjusted basis of such assets at that time.

  Enter on line c the REIT's net unrealized built-in gain reduced by the net recognized built-in gain for prior years. See sections 1374(c)(2) and (d)(1).

Line d.   If the amount on line b exceeds the amount on line a, the excess is treated as a recognized built-in gain in the succeeding tax year.

Line e.   Enter the section 1374(b)(2) deduction. Generally, this is any net operating loss carryforward or capital loss carryforward (to the extent of the net capital gain included in recognized built-in gain for the tax year) arising in tax years for which the REIT was a C corporation. These loss carryforwards must be used to reduce recognized built-in gain for the tax year to the greatest extent possible before they can be used to reduce the REIT's taxable income.

Line h.   Credit carryforwards arising in tax years for which the REIT was a C corporation must be used to reduce the tax on net built-in gain for the tax year to the greatest extent possible before the credit carryforwards can be used to reduce the tax on the REIT's taxable income.

Note.

If the REIT makes the election, the unused minimum tax credits must first be used to reduce the tax on net built-in gain for the tax year to the greatest extent possible. Any remaining unused minimum tax credits are included on line 24g to reduce the REIT's income tax. For more information, see the instructions for line 24g.

Line i.   The REIT's tax on net recognized built-in gain is treated as a loss sustained by the REIT during the same tax year. Deduct the tax attributable to:

  • Ordinary gain as a deduction for taxes on Form 1120-REIT, line 14.

  • Short-term capital gain as a short-term capital loss in Part I of Form 8949.

  • Long-term capital gain as a long-term capital loss in Part II of Form 8949.

How to Report

If the REIT checked the “Other” box, attach a schedule showing the computation of each item included in the total for line 6, Schedule J. In addition, identify: (a) the applicable Code section; (b) the type of taxes or interest; and (c) enter the amount of tax or interest.

Built-in Gains Tax Worksheet

a. Excess of recognized built-in gains over recognized built-in losses a.  
b. Taxable income b.  
c. Enter the net unrealized built-in gain reduced by any net recognized built-in gain for all prior years c.  
d. Net recognized built-in gain (enter the smallest of lines a, b, or c) d.  
e. Section 1374(b)(2) deduction e.  
f. Subtract line e from line d. If zero, enter -0- here and on line i f.  
g. Enter 35% of line f g.  
h. Business credit and minimum tax credit carryforwards under section 1374(b)(3) from C corporation years (see instructions) h.  
i. Tax. Subtract line h from line g (if zero or less, enter -0-). Enter here and include on line 6 of Schedule J (see instructions) i.  

Line 7–Total Tax

Include any deferred tax on the termination of a section 1294 election applicable to shareholders in a qualified electing fund in the amount entered on line 7. See Form 8621 and How to report below.

Subtract from the total for line 7 the deferred tax on the REIT's share of the undistributed earnings of a qualified electing fund (see Form 8621).

How to report

Attach a statement showing the computation of each item included in, or subtracted from, the total for line 7. On the dotted line next to line 7, enter the amount of tax or interest, identify it as tax or interest, and specify the Code section that applies.

Schedule K—Other Information

Be sure to answer all the lines that apply to the REIT.

Question 3

Check the “Yes” box if the REIT is a subsidiary in a parent-subsidiary controlled group (defined below), even if the REIT is a subsidiary member of one group and the parent corporation of another.

Note.

If the REIT is an “excluded member” of a controlled group (see section 1563(b)(2)), it is still considered a member of a controlled group for this purpose.

Parent-subsidiary controlled group.   The term “parent-subsidiary controlled group” means one or more chains of corporations connected through stock ownership (section 1563(a)(1)). Both of the following requirements must be met:

  1. At least 80% of the total combined voting power of all classes of voting stock entitled to vote or at least 80% of the total value of all classes of stock of each corporation in the group (except the parent) must be owned by one or more of the other corporations in the group and

  2. The common parent must own at least 80% of the total combined voting power of all classes of stock entitled to vote or at least 80% of the total value of all classes of stock of one or more of the other corporations in the group. Stock owned directly by other members of the group is not counted when computing the voting power or value.

  See section 1563(d)(1) for the definition of “stock” for purposes of determining stock ownership above.

Question 5

Check the “Yes” box if one foreign person owned at least 25% of (a) the total voting power of all classes of stock of the REIT entitled to vote, or (b) the total value of all classes of stock of the REIT.

The constructive ownership rules of section 318 apply in determining if a REIT is foreign owned. See section 6038A(c)(5) and the related regulations.

Enter on line 5a the percentage owned by the foreign person specified in line 5. On line 5b, enter the name of the owner's country.

Note.

If there is more than one 25%-or-more foreign owner, complete lines 5a and 5b for the foreign person with the highest percentage of ownership.

Foreign person.   The term “foreign person” means:

  • A foreign citizen or nonresident alien.

  • An individual who is a citizen of a U.S. possession (but who is not a U.S. citizen or resident).

  • A foreign partnership.

  • A foreign corporation.

  • Any foreign estate or trust within the meaning of section 7701(a)(31).

  • A foreign government (or one of its agencies or instrumentalities) if it is engaged in the conduct of a commercial activity as described in section 892.

Owner's country.   For individuals, the term “owner's country” means the country of residence. For all others, it is the country where incorporated, organized, created, or administered.

Requirement to file Form 5472.   If the REIT checked “Yes” to line 5, it may have to file Form 5472. Generally, a 25% foreign-owned corporation that had a reportable transaction with a foreign or domestic related party during the tax year must file Form 5472.

  See Form 5472 for filing instructions and penalties for failure to file.

Item 8

Tax-exempt interest.   Show any tax-exempt interest received or accrued. Include any exempt-interest dividends received as a shareholder in a mutual fund or other RIC.

Item 9

Enter the amount of the net operating loss (NOL) carryover to the tax year from prior years, even if some of the loss is used to offset income on this return. The amount to enter is the total of all NOLs generated in prior years but not used to offset income in a tax year prior to 2012. Do not reduce the amount by any NOL deduction reported on line 21a.

Schedule L–Balance Sheets per Books

The balance sheets should agree with the REIT's books and records.

Line 1. Cash.   Include certificates of deposits as cash on line 1.

Line 4. Tax-exempt securities.   Include on this line:

  • State and local government obligations, the interest on which is excludable from gross income under section 103(a), and

  • Stock in a mutual fund or other RIC that distributed exempt-interest dividends during the tax year of the REIT.

Line 24. Adjustments to shareholders' equity.   Examples of adjustments to report on this line include:

  • Unrealized gains and losses on securities held “available for sale.”

  • Foreign currency translation adjustments.

  • The excess of additional pension liability over unrecognized prior service cost.

  • Guarantees of employee stock (ESOP) debt.

  • Compensation related to employee stock award plans.

   If the total adjustment to be entered on line 24 is a negative number, enter the amount in parentheses.

Schedule M-1

Reconciliation of Income (Loss) per Books With Income per Return

Line 5c. Travel and entertainment.   Include any of the following:

  • Meals and entertainment not deductible under section 274(n).

  • Expenses for the use of an entertainment facility.

  • The part of business gifts over $25.

  • Expenses of an individual over $2,000, which are allocable to conventions on cruise ships.

  • Employee achievement awards over $400.

  • The cost of entertainment tickets over face value (also subject to 50% limit under section 274(n)).

  • The cost of skyboxes over the face value of nonluxury box seat tickets.

  • The part of luxury water travel not deductible under section 274(m).

  • Expenses for travel as a form of education.

  • Other nondeductible travel and entertainment expenses.

  For more information, see Pub. 542, Corporations.

Line 7. Tax-exempt interest.   Include as interest any exempt-interest dividends received by the REIT as a shareholder in a mutual fund or other RIC.

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