U.S. Income Tax Return for Real Estate Investment Trusts

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Instructions for Form 1120-REIT

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14:42 - 31-JAN-2008

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2007

Department of the Treasury
Internal Revenue Service

Instructions for Form
1120-REIT
U.S. Income Tax Return for Real Estate Investment Trusts
Section references are to the Internal
Revenue Code unless otherwise noted.
Contents
What’s New . . . . . . . . . . . . . . . .
Photographs of Missing Children . .
Unresolved Tax Issues . . . . . . . .
How To Get Forms and
Publications . . . . . . . . . . . . . .
General Instructions . . . . . . . . .
Purpose of Form . . . . . . . . . . . . .
Who Must File . . . . . . . . . . . . . .
General Requirements to Qualify
as a REIT . . . . . . . . . . . . . . . .
Other Requirements . . . . . . . . . .
Termination of Election . . . . . . . .
Taxable REIT Subsidiaries (TRS) .
Where To File . . . . . . . . . . . . . . .
When To File . . . . . . . . . . . . . . .
Who Must Sign . . . . . . . . . . . . . .
Paid Preparer Authorization . . . . .
Assembling the Return . . . . . . . .
Depository Methods of Tax
Payment . . . . . . . . . . . . . . . . .
Estimated Tax Payments . . . . . . .
Interest and Penalties . . . . . . . . .
Accounting Methods . . . . . . . . . .
Accounting Period . . . . . . . . . . . .
Rounding Off to Whole Dollars . . .
Recordkeeping . . . . . . . . . . . . . .
Other Forms That May Be
Required . . . . . . . . . . . . . . . .
Statements . . . . . . . . . . . . . . . .
Specific Instructions . . . . . . . . .
Period Covered . . . . . . . . . . . . .
Name and Address . . . . . . . . . . .
100%-owned Subsidiaries and
Personal Holding Companies . .
Employer Identification Number
(EIN) . . . . . . . . . . . . . . . . . . .
Date REIT Established . . . . . . . .
Total Assets . . . . . . . . . . . . . . . .
Final Return, Name Change,
Address Change, or Amended
Return . . . . . . . . . . . . . . . . . .
Type of REIT . . . . . . . . . . . . . . .
PBA Code . . . . . . . . . . . . . . . . .
Part I — Real Estate Investment
Trust Taxable Income . . . . . . . .
Part II — Tax on Net Income From
Foreclosure Property . . . . . . . .
Part III — Tax for Failure To Meet
Certain Source-of-Income
Requirements . . . . . . . . . . . . .
Part IV — Tax on Net Income From
Prohibited Transactions . . . . . .
Schedule A . . . . . . . . . . . . . . . .
Schedule J . . . . . . . . . . . . . . . . .
Schedule K . . . . . . . . . . . . . . . .
Schedule L . . . . . . . . . . . . . . . . .
Schedule M-1 . . . . . . . . . . . . . . .

What’s New

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• A corporation that is a policyholder
owning one or more employer-owned life
insurance contracts issued after August 17,
2006, must file new Form 8925,
Employer-Owned Life Insurance Contracts.
• The increased deduction for qualified
reforestation expenses for small timber
producers no longer applies to expenses
paid or incurred after December 31, 2007.
• The election to deduct GO Zone clean-up
costs no longer applies to costs paid or
incurred after December 31, 2007.
• New Principal Business Activity (PBA)
codes have been added for new Item H.
See page 6 for details.

Photographs of Missing
Children
The Internal Revenue Service is a proud
partner with the National Center for Missing
and Exploited Children. Photographs of
missing children selected by the Center may
appear in instructions on pages that would
otherwise be blank. You can help bring
these children home by looking at the
photographs and calling 1-800-THE-LOST
(1-800-843-5678) if you recognize a child.

Unresolved Tax Issues
If the Real Estate Investment Trust (REIT)
has attempted to deal with an IRS problem
unsuccessfully, it should contact the
Taxpayer Advocate. The Taxpayer
Advocate independently represents the
REIT’s interests and concerns within the
IRS by protecting its rights and resolving
problems that have not been fixed through
normal channels.
While Taxpayer Advocates cannot
change the tax law or make a technical tax
decision, they can clear up problems that
resulted from previous contacts and ensure
that the REIT’s case is given a complete
and impartial review.
The REIT’s assigned personal advocate
will listen to its point of view and will work
with the REIT to address its concerns. The
REIT can expect the advocate to provide:
• An impartial and independent look at your
problem,
• Timely acknowledgement,
• The name and phone number of the
individual assigned to its case,
• Updates on progress,
• Timeframes for action,
• Speedy resolution, and
• Courteous service.
Cat. No. 64243J

When contacting the Taxpayer Advocate,
the REIT should be prepared to provide the
following information:
• The REIT’s name, address, and employer
identification number.
• The name and telephone number of an
authorized contact person and the hours he
or she can be reached.
• The type of tax return and year(s)
involved.
• A detailed description of the problem.
• Previous attempts to solve the problem
and the office that was contacted.
• A description of the hardship the REIT is
facing and supporting documentation (if
applicable).
The REIT can contact a Taxpayer
Advocate as follows:
• Call the Taxpayer Advocate’s toll-free
number: 1-877-777-4778.
• Call, write, or fax the Taxpayer Advocate
office in its area (see Pub. 1546 for
addresses and phone numbers).
• TTY/TDD help is available by calling
1-800-829-4059.
• Visit the website at: www.irs.gov/
advocate.

How To Get Forms and
Publications
Internet. You can access the IRS website
24 hours a day, 7 days a week, at www.irs.
gov to:
• Download forms, instructions, and
publications;
• Order IRS products online;
• Research your tax questions online;
• Search publications online by topic or
keyword; and
• Sign up to receive local and national tax
news by email.
IRS Tax Products CD/DVD. You can order
Publication 1796, IRS Tax Products CD/
DVD, and obtain:
• Current year forms, instructions, and
publications;
• Prior year forms, instructions, and
publications;
• Bonus: Historical Tax Products DVD –
Ships with the final release;
• Tax Map: an electronic research tool and
finding aid;
• Tax law frequently asked questions
(FAQs);
• Tax topics from the IRS telephone
response system;
• Fill-in, print and save features for most tax
forms;
• Internal Revenue Bulletins; and
• Toll-free and email technical support.
The CD/DVD is released twice during the
year. The first release will ship the beginning

Page 2 of 14

Instructions for Form 1120-REIT

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of January and the final release will ship the
beginning of March.
Buy the CD/DVD from the National
Technical Information Service (NTIS) at:
www.irs.gov/cdorders for $35 (no handling
fee) or call 1-877-CDFORMS
(1-877-233-6767) toll free to buy the CD/
DVD for $35 (plus a $5 handling fee). Price
is subject to change.
By phone and in person. You can order
forms and publications by calling
1-800-TAX-FORM (1-800-829-3676). You
can also get most forms and publications at
your local IRS office.

General Instructions
Purpose of Form
Use Form 1120-REIT, U.S. Income Tax
Return for Real Estate Investment Trusts, to
report the income, gains, losses,
deductions, credits, and certain penalties,
and to figure the income tax liability of a
REIT.

Who Must File
A corporation, trust, or association that
meets certain conditions (discussed below)
must file Form 1120-REIT if it elects to be
treated as a REIT for the tax year (or has
made that election for a prior tax year and
the election has not been terminated or
revoked). The election is made by figuring
taxable income as a REIT on Form
1120-REIT.

General Requirements To
Qualify as a REIT
To qualify as a REIT, an organization:
• Must be a corporation, trust, or
association.
• Must be managed by one or more
trustees or directors.
• Must have beneficial ownership: (a)
evidenced by transferable shares, or by
transferable certificates of beneficial
interest; and (b) held by 100 or more
persons. (The REIT does not have to meet
this requirement until its 2nd tax year.)
• Would otherwise be taxed as a domestic
corporation.
• Must be neither a financial institution
(referred to in section 582(c)(2)), nor a
subchapter L insurance company.
• Cannot be closely held, as defined in
section 856(h). (The REIT does not have to
meet this requirement until its 2nd tax year).
If a REIT meets the requirement for
ascertaining actual ownership (see
Regulations section 1.857-8 for details), and
did not know (after exercising reasonable
diligence), or have reason to know, that it
was closely held, it will be treated as
meeting the requirement that it is not closely
held.

Other Requirements
The gross income and diversification of
investment requirements of section 856(c)
must be met. The organization must:
• Have been treated as a REIT for all tax
years beginning after February 28, 1986, or

Where To File
File the REIT’s return at the applicable IRS address listed below.
If the REIT’s principal
And the total assets at
business, office, or agency the end of the tax year
is located in:
are:
Connecticut, Delaware,
District of Columbia, Illinois,
Indiana, Kentucky, Maine,
Maryland, Massachusetts,
Michigan, New Hampshire,
New Jersey, New York, North
Carolina, Ohio, Pennsylvania,
Rhode Island, South
Carolina, Vermont, Virginia,
West Virginia, Wisconsin

Use the following address:

Less than $10 million

Department of the Treasury
Internal Revenue Service Center
Cincinnati, OH 45999-0012

$10 million or more

Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0012

Alabama, Alaska, Arizona,
Arkansas, California,
Colorado, Florida, Georgia,
Hawaii, Idaho, Iowa, Kansas,
Louisiana, Minnesota,
Mississippi, Missouri,
Montana, Nebraska, Nevada,
New Mexico, North Dakota,
Oklahoma, Oregon, South
Dakota, Tennessee, Texas,
Utah, Washington, Wyoming
A foreign country or U.S.
possession

Any amount

Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0012

Any amount

Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409

A group of corporations with members located in more than one service center area will
often keep all the books and records at the principal office of the managing corporation. In
this case, the tax returns of the corporations may be filed with the service center for the area
in which the principal office of the managing corporation is located.

• Had, at the end of the tax year, no

accumulated earnings and profits from any
tax year that it was not a REIT.
For this purpose, distributions are treated
as made from the earliest earnings and
profits accumulated in any non-REIT tax
year. See section 857(d)(3).
• The organization must adopt a calendar
tax year unless it first qualified for REIT
status before October 5, 1976.
• The deduction for dividends paid
(excluding net capital gain dividends, if any)
must equal or exceed:
1. 90% of the REIT’s taxable income
(excluding the deduction for dividends paid
and any net capital gain); plus
2. 90% of the excess of the REIT’s net
income from foreclosure property over the
tax imposed on that income by section
857(b)(4)(A); less
3. Any excess noncash income as
determined under section 857(e).
See sections 856 and 857, and the
related regulations for details and
exceptions.

Termination of Election
The election to be treated as a REIT
remains in effect until terminated, revoked,
or the REIT has failed to meet the
requirements of the statutory relief
provisions. It terminates automatically for
any tax year in which the corporation, trust,
or association is not a qualified REIT.
The organization may revoke the election
for any tax year after the 1st tax year the

-2-

election is effective by filing a statement with
the service center where it files its income
tax return. The statement must be filed on or
before the 90th day after the 1st day of the
tax year for which the revocation is to be
effective. The statement must include the
following:
• The name, address, and employer
identification number of the organization;
• The tax year for which the election was
made;
• A statement that the organization
(according to section 856(g)(2)) revokes its
election under section 856(c)(1) to be a
REIT; and
• The signature of an official authorized to
sign the income tax return of the
organization.
The organization may not make a new
election to be taxed as a REIT during the 4
years following the 1st year for which the
termination or revocation is effective. See
section 856(g)(4) for exceptions.

Taxable REIT Subsidiaries
(TRS)
A REIT may own up to 100% of the stock in
one or more taxable REIT subsidiaries
(TRS). A TRS must be a corporation (other
than a REIT or a qualified REIT subsidiary)
and may provide services to the REIT’s
tenants without disqualifying the rent
received by the REIT. See section 856(l) for
details, including certain restrictions on the
type of business activities a TRS may
perform. Also, not more than 20% of the fair
market value (FMV) of a REIT’s total assets

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Instructions for Form 1120-REIT

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may be securities of one or more TRSs (see
section 856(c)(4) for details).
Transactions between a TRS and its
associated REIT must be at arm’s length. A
REIT may be subject to a 100% tax to the
extent it improperly allocates income and
deductions between the REIT and the TRS
(see section 857(b)(7) for details). Additional
limitations on transactions between a TRS
and its associated REIT include:
• Limitations on income from a TRS that
may be treated as rents from real property
by the REIT (see section 856(d)(8)).
• Limitations on a TRS’s deduction for
interest paid to its associated REIT (see
section 163(j)).
To elect to have an eligible corporation
treated as a TRS, the corporation and the
REIT must jointly file Form 8875, Taxable
REIT Subsidiary Election.

When To File
Generally, a REIT must file its income tax
return by the 15th day of the 3rd month after
the end of its tax year. A new REIT filing a
short period return must generally file by the
15th day of the 3rd month after the short
period ends. A REIT that has dissolved must
generally file by the 15th day of the 3rd
month after the date it dissolved.
If the due date falls on a Saturday,
Sunday, or legal holiday, the REIT can file
on the next business day.

Private delivery services
REITs can use certain private delivery
services designated by the IRS to meet the
“timely mailing as timely filing/paying” rule
for tax returns and payments.
These private delivery services include
only the following.
• DHL Express (DHL): DHL Same Day
Service, DHL Next Day 10:30 am, DHL Next
Day 12:00 pm, DHL Next Day 3:00 pm, and
DHL 2nd Day Service.
• Federal Express (FedEx): FedEx Priority
Overnight, FedEx Standard Overnight,
FedEx 2Day, FedEx International Priority,
and FedEx International First.
• United Parcel Service (UPS): UPS Next
Day Air, UPS Next Day Air Saver, UPS 2nd
Day Air, UPS 2nd Day Air A.M., UPS
Worldwide Express Plus, and UPS
Worldwide Express.
The private delivery service can tell you
how to get written proof of the mailing date.
Private delivery services cannot
deliver items to P.O. boxes. You
CAUTION must use the U.S. Postal Service to
mail any item to an IRS P.O. box address.

!

Extension of Time To File
File Form 7004, Application for Automatic
6-month Extension of Time To File Certain
Business Income Tax, Information, and
Other Returns, to request a 6-month
extension of time to file. Generally, file Form
7004 by the regular due date of the REIT’s
income tax return.

Who Must Sign
The return must be signed and dated by:

• The president, vice president, treasurer,

assistant treasurer, chief accounting officer;
or

• Any other corporate officer (such as tax
officer) authorized to sign.
If a return is filed on behalf of a REIT by
a receiver, trustee, or assignee, the fiduciary
must sign the return, instead of the
corporate officer. Returns and forms signed
by a receiver or trustee in bankruptcy on
behalf of a REIT must be accompanied by a
copy of the order or instructions of the court
authorizing signing of the return or form.
If an employee of the REIT completes
Form 1120-REIT, the paid preparer’s space
should remain blank. Anyone who prepares
Form 1120-REIT but does not charge the
REIT should not complete that section.
Generally, anyone who is paid to prepare
the return must sign it and fill in the “Paid
Preparer’s Use Only” area.
The paid preparer must complete the
required preparer information and:
• Sign the return in the space provided for
the preparer’s signature; and
• Give a copy of the return to the taxpayer.
Note. A paid preparer may sign original or
amended returns by rubber stamp,
mechanical device, or computer software
program.

Paid Preparer
Authorization
If the REIT wants to allow the IRS to discuss
its 2007 tax return with the paid preparer
who signed it, check the “Yes” box in the
signature area of the return. This
authorization applies only to the individual
whose signature appears in the “Paid
Preparer’s Use Only” section of the REIT’s
return. It does not apply to the firm, if any,
shown in that section.
If the “Yes” box is checked, the REIT is
authorizing the IRS to call the paid preparer
to answer any questions that may arise
during the processing of its return. The REIT
is also authorizing the paid preparer to:
• Give the IRS any information that is
missing from the return,
• Call the IRS for information about the
processing of the return or the status of any
related refund or payment(s), and
• Respond to certain IRS notices about
math errors, offsets, and return preparation.
The REIT is not authorizing the paid
preparer to receive any refund check, bind
the REIT to anything (including any
additional tax liability), or otherwise
represent the corporation before the IRS.
The authorization will automatically end
no later than the due date (without regard to
extensions) for filing the REIT’s 2008 tax
return. If the REIT wants to expand the paid
preparer’s authorization, see Pub. 947,
Practice Before the IRS and Power of
Attorney.

Assembling the Return
To ensure that the REIT’s tax return is
correctly processed, attach all schedules
and other forms after page 4, Form
1120-REIT, and in the following order.
1. Schedule N (Form 1120).
2. Schedule O (Form 1120).
3. Form 4626.
4. Form 4136.
5. Additional schedules in alphabetical
order.

-3-

6. Additional forms in numerical order.
Complete every applicable entry space
on Form 1120-REIT. Do not enter “See
attached” instead of completing the entry
spaces. If more space is needed on the
forms or schedules, attach separate sheets
using the same size and format as the
printed forms. If there are supporting
statements and attachments, arrange them
in the same order as the schedules or forms
they support and attach them last. Show the
totals on the printed forms. Enter the REIT’s
name and EIN on each supporting
statement or attachment.

Depository Methods
of Tax Payment
The REIT must pay the tax due in full no
later than the 15th day of the 3rd month
after the end of the tax year. Generally, this
date falls on March 15th after the close of
the REIT’s tax year, unless the REIT has
maintained a fiscal year. The two methods
of depositing REIT income taxes, including
the capital gains tax, are discussed below.

Electronic Deposit Requirement
The REIT must make electronic deposits of
all depository taxes (such as employment
tax, excise tax, and REIT income tax) using
the Electronic Federal Tax Payment System
(EFTPS) in 2008 if:
• The total deposits of such taxes in 2006
were more than $200,000; or
• The REIT was required to use EFTPS in
2007.
If the REIT is required to use EFTPS and
fails to do so, it may be subject to a 10%
penalty. If the REIT is not required to use
EFTPS, it may participate voluntarily. To
enroll in or receive more information about
EFTPS, call 1-800-555-4477. To enroll
online, visit www.eftps.gov.
Depositing on time. For EFTPS deposits
to be made timely, the REIT must initiate the
transaction at least 1 business day before
the date the deposit is due.

Deposits With Form 8109
If the REIT does not use EFTPS, deposit
REIT income tax payments (and estimated
tax payments) with Form 8109, Federal Tax
Deposit Coupon. If the REIT does not have
a preprinted Form 8109, use Form 8109-B
to make deposits. You can get this form by
calling 1-800-829-4933 or by visiting an IRS
taxpayer assistance center. Have the REIT’s
EIN ready when you call or visit.
Do not send deposits directly to an IRS
office; otherwise, the REIT may have to pay
a penalty. Mail or deliver the completed
Form 8109 with the payment to an
authorized depositary (a commercial bank or
other financial institution authorized to
accept federal tax deposits). Make checks
or money orders payable to the depositary.
If the REIT prefers, it can mail the
coupon and payment to:
Financial Agent, Federal Tax Deposit
Processing
P.O. Box 970030
St. Louis, MO 63197
Make the check or money order payable to
“Financial Agent.”

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Instructions for Form 1120-REIT

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

To help ensure proper crediting, enter:

• the REIT’s EIN;
• the tax period to which the deposit
applies; and

• “Form 1120-REIT” on the check or money

order.
Darken the “1120” box under “Type of Tax”
and the appropriate “Quarter” box under
“Tax Period” on the coupon. Records of
these deposits will be sent to the IRS. For
more information, see “Marking the Proper
Tax Period” in the instructions for Form
8109.
For more information on deposits, see
the instructions in the coupon booklet (Form
8109) and Pub. 583, Starting a Business
and Keeping Records.

If the REIT owes tax when it files
Form 1120-REIT, do not include the
CAUTION payment with the tax return. Instead,
mail or deliver the payment with Form 8109
to an authorized depositary or use EFTPS, if
applicable.

!

Estimated Tax Payments
Generally, the following rules apply to the
REIT’s payments of estimated tax.
• The REIT must make installment
payments of estimated tax if it expects its
total tax for the year (less applicable credits)
to be $500 or more.
• The installments are due by the 15th day
of the 4th, 6th, 9th, and 12th months of the
tax year. If any date falls on a Saturday,
Sunday, or legal holiday, the installment is
due on the next regular business day.
• Use Form 1120-W, Estimated Tax for
Corporations, as a worksheet to compute
estimated tax.
• If the REIT does not use EFTPS, use the
deposit coupons (Forms 8109) to make
deposits of estimated tax.
• If the REIT overpaid its estimated tax, it
may be able to get a quick refund by filing
Form 4466, Corporation Application for
Quick Refund of Overpaid Estimated Tax.
The overpayment must be at least 10% of
the REIT’s expected income tax liability and
at least $500.
For more information, including
penalties, see the Line 25. Estimated Tax
Penalty instructions.

Interest and Penalties
Interest. Interest is charged on taxes paid
late even if an extension of time to file is
granted. Interest is also charged on
penalties imposed for failure to file,
negligence, fraud, substantial valuation
misstatements, and substantial
understatements of tax from the due date
(including extensions) to the date of
payment. The interest charge is figured at a
rate determined under section 6621.
Late filing of return. A REIT that does not
file its tax return by the due date, including
extensions, may be penalized 5% of the
unpaid tax for each month or part of a month
the return is late, up to a maximum of 25%
of the unpaid tax. The minimum penalty for
a return that is over 60 days late is the
smaller of the tax due or $100. The penalty
will not be imposed if the REIT can show
that the failure to file on time was due to
reasonable cause. REITs that file late must
attach a statement explaining the
reasonable cause.

Late payment of tax. A REIT that does not
pay the tax when due generally may be
penalized 1/2 of 1% of the unpaid tax for
each month or part of a month the tax is not
paid, up to a maximum of 25% of the unpaid
tax. The penalty will not be imposed if the
REIT can show that the failure to pay on
time was due to reasonable cause.
Trust fund recovery penalty. This penalty
may apply if certain excise, income, social
security, and Medicare taxes that must be
collected or withheld are not collected or
withheld, or these taxes are not paid. These
taxes are generally reported on:
• Form 720, Quarterly Federal Excise Tax
Return;
• Form 941, Employer’s Quarterly Federal
Tax Return;
• Form 943, Employer Annual Federal Tax
Return for Agricultural Employees; or
• Form 945, Annual Return of Withheld
Federal Income Tax.
The trust fund recovery penalty may be
imposed on all persons who are determined
by the IRS to have been responsible for
collecting, accounting for, and paying over
these taxes, and who acted willfully in not
doing so. The penalty is equal to the unpaid
trust fund tax. See the Instructions for Form
720, or Publication 15 (Circular E),
Employer’s Tax Guide, for details, including
the definition of responsible persons.
Failure to ascertain ownership. If the
REIT fails to comply with Regulations
section 1.857-8 for ascertaining ownership
and maintaining factual ownership records
for a tax year, it must pay a $25,000 penalty
($50,000 for intentional disregard) upon
notice and demand by the IRS. If the REIT
can show that the failure was due to
reasonable cause, the penalty may not be
imposed. For more information, see section
857(f).
Failures to satisfy certain REIT
qualification provisions. If the REIT is
required to pay the $50,000 penalty under
section 856(g)(5)(C) for each failure to
satisfy a REIT qualification provision of
sections 856 – 859 (other than section
856(c)(2), 856(c)(3), or section 856(c)(4))
due to reasonable cause and not willful
neglect, see the instructions for Schedule J,
line 2f, on page 11.
Other penalties. Other penalties can be
imposed for negligence, substantial
understatement of tax, reportable
transaction understatements, and fraud. See
sections 6662, 6662A, and 6663.

Accounting Methods
Figure taxable income using the method of
accounting regularly used in keeping the
REIT’s books and records. In all cases, the
method used must clearly show taxable
income.
Generally, permissible methods include:
• Cash,
• Accrual, or
• Any other method authorized by the
Internal Revenue Code.
Accrual method. Generally, a REIT must
use the accrual method of accounting if its
average annual gross receipts exceed $5
million. See section 448(c).
Under the accrual method, an amount is
includible in income when:

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1. All the events have occurred that fix
the right to receive the income, which is the
earliest of the date:
a. the required performance takes place,
b. payment is due, or
c. payment is received, and
2. The amount can be determined with
reasonable accuracy.
See Regulations section 1.451-1(a) for
details and Publication 538, Accounting
Periods and Methods.
Change in accounting method. To
change its method of accounting used to
report taxable income (for income as a
whole or for the treatment of any material
item), the REIT must file Form 3115,
Application for Change in Accounting
Method. For more information, see Form
3115.
Section 481(a) adjustment. The REIT
may have to make an adjustment under
section 481(a) to prevent amounts of
income or expenses from being duplicated
or omitted. This is referred to as a “section
481(a) adjustment.” The section 481(a)
adjustment period is generally 1 year for a
net negative adjustment and 4 years for a
net positive adjustment. However, a REIT
may elect to use a 1-year adjustment period
if the net section 481(a) adjustment for the
change is less than $25,000. The REIT must
complete the appropriate lines of Form 3115
to make the election.
Include any net positive section 481(a)
adjustment on page 1, line 7. Report any
negative adjustment on page 1, line 18.

Accounting Period
A REIT must figure its taxable income on
the basis of a tax year. A tax year is the
annual accounting period a REIT uses to
keep its records and report its income and
expenses. A REIT adopts a tax year when it
files its first income tax return. It must adopt
a tax year by the due date (not including
extensions) of its initial income tax return.
Note. A REIT must adopt a calendar year
unless it first qualified for REIT status before
October 5, 1976.
Change of tax year. A REIT may not
change its tax year to any tax year other
than the calendar year. Generally, a REIT
must receive consent from the IRS before
changing its tax year by filing Form 1128,
Application To Adopt, Change, or Retain a
Tax Year.
However, upon electing to be taxed as a
REIT, an entity that has not engaged in any
active trade or business may change its tax
year to a calendar year without obtaining the
consent.
For more information on change of tax
year, see Form 1128, Regulations section
1.442-1, and Pub. 538.

Rounding Off to
Whole Dollars
The REIT may round off cents to whole
dollars on its returns and schedules. If the
REIT does round to whole dollars, it must
round all amounts. To round, drop amounts
under 50 cents and increase amounts from
50 to 99 cents to the next dollar (for
example, $1.39 becomes $1 and $2.50
becomes $3).

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If two or more amounts must be added to
figure the amount to enter on a line, include
cents when adding the amounts and round
off only the total.

Recordkeeping
Keep the REIT’s records for as long as they
may be needed for the administration of any
provision of the Internal Revenue Code.
Usually, records that support an item of
income, deduction, or credit on the return
must be kept for 3 years from the date the
return is due or filed, whichever is later.
Keep records that verify the REIT’s basis in
property for as long as they are needed to
figure the basis of the original or
replacement property.
The REIT should also keep copies of all
filed returns. They help in preparing future
and amended returns.

Other Forms That May Be
Required
In addition to Form 1120-REIT, the REIT
may have to file some of the following forms.
Also see Pub. 542, Corporations, for an
expanded list of forms the REIT may be
required to file.
Form 926, Return by a U.S. Transferor of
Property to a Foreign Corporation, is filed to
report certain transfers to foreign
corporations under section 6038B.
Form 966, Corporate Dissolution or
Liquidation, is used to report the adoption of
a resolution or plan to dissolve the
corporation or liquidate any of its stock.
Form 976, Claim for Deficiency Dividends
for Personal Holding Companies, Regulated
Investment Companies, and Real Estate
Investment Trusts, is used to claim a
deduction for deficiency dividends. See
section 860 and the related regulations.
Forms 1042,1042-S, and 1042-T, Annual
Withholding Tax Return for U.S. Source
Income of Foreign Persons, Form 1042-S,
Foreign Person’s U.S. Source Income
Subject to Withholding, and Form 1042-T,
Annual Summary and Transmittal of Forms
1042-S. Use these forms to report and send
withheld tax on payments or distributions
made to nonresident alien individuals,
foreign partnerships, or foreign corporations
to the extent these payments constitute
gross income from sources within the United
States (see sections 861 through 865).
Also, see sections 1441 and 1442, and
Pub. 515, Withholding of Tax on
Nonresident Aliens and Foreign Entities.
Form 1099-DIV, Dividends and
Distributions. Use this form to report certain
dividends and distributions.
Form 2438, Undistributed Capital Gains
Tax Return, must be filed by the REIT if it
designates undistributed net long-term
capital gains under section 857(b)(3)(D).
Form 2439, Notice to Shareholder of
Undistributed Long-Term Capital Gains,
must be completed and a copy given to
each shareholder for whom the REIT paid
tax on undistributed net long-term capital
gains under section 857(b)(3)(D).
Form 3520, Annual Return To Report
Transactions With Foreign Trusts and
Receipt of Certain Foreign Gifts, is required
either if the REIT received a distribution

from a foreign trust or if the REIT was a
grantor of, transferor of, or transferor to a
foreign trust that existed during the tax year.
See Question 5 of Schedule N (Form 1120).
Form 5471, Information Return of U.S.
Persons With Respect to Certain Foreign
Corporations, is required if the REIT controls
a foreign corporation; acquires, disposes of,
or owns 10% or more in value or vote of the
outstanding stock of a foreign corporation;
or had control of a foreign corporation for an
uninterrupted period of at least 30 days
during the annual accounting period of the
foreign corporation. See Question 4 of
Schedule N (Form 1120).
Form 5472, Information Return of a 25%
Foreign-Owned U.S. Corporation or a
Foreign Corporation Engaged in a U.S.
Trade or Business. This form is filed if the
REIT is 25% or more foreign owned. See
the instructions for Question 5, Schedule K,
on page 12.
Form 8275, Disclosure Statement, and
Form 8275-R, Regulation Disclosure
Statement, are used to disclose items or
positions taken on a tax return that are not
otherwise adequately disclosed on a tax
return or that are contrary to Treasury
regulations (to avoid parts of the
accuracy-related penalty or certain preparer
penalties).
Form 8300, Report of Cash Payments
Over $10,000 Received in a Trade or
Business. Use this form to report the receipt
of more than $10,000 in cash or foreign
currency in one transaction or a series of
related transactions.
Form 8612, Return of Excise Tax on
Undistributed Income of Real Estate
Investment Trusts, is filed if the REIT is
liable for the 4% excise tax on undistributed
income imposed under section 4981.
Form 8621, Return by a Shareholder of a
Passive Foreign Investment Company or
Qualified Electing Fund. Use this form to
make certain elections by shareholders in a
passive foreign investment company and to
figure certain deferred taxes.
Form 8865, Return of U.S. Persons With
Respect To Certain Foreign Partnerships. A
REIT may have to file Form 8865 if it:
1. Controlled a foreign partnership (i.e.,
owned more than a 50% direct or indirect
interest in the partnership).
2. Owned at least a 10% direct or
indirect interest in a foreign partnership
while U.S. persons controlled that
partnership.
3. Had an acquisition, disposition, or
change in proportional interest in a foreign
partnership that:
• Increased its direct interest to at least
10% or reduced its direct interest of at least
10% to less than 10%.
• Changed its direct interest by at least a
10% interest.
4. Contributed property to a foreign
partnership in exchange for a partnership
interest if:
• Immediately after the contribution, the
REIT owned, directly or indirectly, at least a
10% interest in the foreign partnership; or
• The FMV of the property the REIT
contributed to the foreign partnership in
exchange for a partnership interest, when
added to other contributions of property
made to the foreign partnership during the

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preceding 12-month period, exceeds
$100,000.
Also, the REIT may have to file Form
8865 to report certain dispositions by a
foreign partnership of property it previously
contributed to that foreign partnership if it
was a partner at the time of the disposition.
For more details, including penalties for
failing to file Form 8865, see Form 8865 and
its separate instructions.
Form 8875, Taxable REIT Subsidiary
Election, is filed jointly by a corporation and
a REIT to have the corporation treated as a
taxable REIT subsidiary.

Statements
Reportable transaction disclosure
statement. Disclose information for each
reportable transaction in which the REIT
participated. Form 8886, Reportable
Transaction Disclosure Statement, must be
filed for each tax year that the federal
income tax liability of the REIT is affected by
its participation in the transaction. The REIT
may have to pay a penalty if it is required to
file Form 8886 and does not do so. The
following are reportable transactions.
1. Any listed transaction, which is a
transaction that is the same as or
substantially similar to tax avoidance
transactions identified by the IRS.
2. Any transaction offered under
conditions of confidentiality for which the
REIT paid an advisor a fee of at least
$250,000.
3. Certain transactions for which the
corporation has contractual protection
against disallowance of the tax benefits.
4. Certain transactions resulting in a
loss of at least $10 million in any single year
or $20 million in any combination of years.
5. Certain transactions resulting in a tax
credit of more than $250,000, if the REIT
held an asset generating the credit for 45
days or less.
6. Any transaction identified by the IRS
in published guidance as a “transaction of
interest” (a transaction that the IRS believes
has a potential for tax avoidance or evasion,
but has not yet been identified as a listed
transaction).
Penalties. The REIT may have to pay a
penalty if it is required to disclose a
reportable transaction under section 6011
and fails to properly complete and file Form
8886. Penalties also apply under section
6707A if the REIT fails to file Form 8886
with its Form 1120-REIT, fails to provide a
copy of Form 8886 to the Office of Tax
Shelter Analysis (OTSA), or files a form that
fails to include all the information required
(or includes incorrect information). Other
penalties, such as an accuracy-related
penalty under section 6662A, may also
apply. See the Instructions for Form 8886
for details on these and other penalties.
Reportable transactions by material
advisors. Material advisors to any
reportable transaction must disclose certain
information about the reportable transaction
by filing Form 8918, Material Advisor
Disclosure Statement, with the IRS. Form
8918 replaces Form 8264, which was
previously used by material advisors for
disclosure.

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Transfers to a corporation controlled by
the transferor. If a person receives stock
of a corporation in exchange for property,
and no gain or loss is recognized under
section 351, the person (transferor) and the
transferee must each attach to their tax
returns the information required by
Regulations section 1.351-3.
Dual consolidated losses. If a domestic
corporation incurs a dual consolidated loss
(as defined in Regulations section
1.1503-2(c)(5)), the corporation (or
consolidated group) may need to attach an
elective relief agreement and/or an annual
certification as provided in Regulations
section 1.1503-2(g)(2).
Election to reduce basis under section
362(e)(2)(C). The transferor and transferee
in certain section 351 transactions can make
a joint election under section 362(e)(2)(C) to
limit the transferor’s basis in the stock
received instead of the transferee’s basis in
the transferred property. The transferor and
transferee may make the election by
attaching the statement as provided in
Notice 2005-70, 2005-41 I.R.B. 694, to their
tax returns filed by the due date (including
extensions) for the tax year in which the
transaction occurred. Once made, the
election is irrevocable. See section
362(e)(2)(C) and Notice 2005-70.
Determination under section 860(e)(4).
For purposes of section 860, and the related
regulations, a REIT that makes a
determination under section 860(e)(4) is
required to attach its statement to its
amendment, or supplement, to its tax return
for the relevant tax year.
Other forms and statements. See Pub.
542 for a list of other forms and statements
a corporation may need to file in addition to
the forms and statements discussed
throughout these instructions.

Specific Instructions
Period Covered
File the 2007 return for calendar year 2007
and fiscal years that begin in 2007 and end
in 2008. For a fiscal year return, fill in the tax
year space at the top of the form.
Note. The 2007 Form 1120-REIT can also
be used if:

• The REIT has a tax year of less than 12
months that begins and ends in 2008; and
• The 2008 Form 1120-REIT is not
available at the time the REIT is required to
file its return.
The REIT must show its 2008 tax year
on the 2007 Form 1120-REIT and take into
account any tax law changes that are
effective for tax years beginning after
December 31, 2007.

Name and Address
Type or print the REIT’s true name (as set
forth in the charter or other legal document
creating it) and address on the appropriate
lines. Include the suite, room, or other unit
number after the street address. 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 that form
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 — Click on the EIN link at www.irs.
gov/businesses/small. The EIN is issued
immediately once the application information
is validated.
• By telephone at 1-800-829-4933 from
7:00 a.m. to 10:00 p.m. Monday through
Friday in the REIT’s local time zone.
• By mailing or faxing 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. See Pub. 583 for
details.
Note. The online application process is not
yet available for REITs with addresses in
foreign countries or Puerto Rico.

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-.

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

• 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.”
Note. If a change in address occurs after
the return is filed, use Form 8822, Change
of Address, to notify the IRS of the new
address.
• 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
• 531114 – Cooperative Housing
• 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))

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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.
Also, if required, include the same amount
on Schedule M-1, line 7.
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). For tax years beginning after
October 22, 2004, the customary services
exception under section 857(b)(7)(B)(ii) was
eliminated and replaced with an existing
“safe harbor.” Services customarily
furnished to tenants of a REIT include
parking facilities. See Rev. Rul. 2004-24,
which is on page 550 of I.R.B. 2004-10, 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
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 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 in detail 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.

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.
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.
Business startup expenses. Business
start-up and organizational costs must be
capitalized unless an election is made to
deduct or amortize them. For costs paid or
incurred before October 23, 2004, the REIT
must capitalize them unless it elects to
amortize these costs over a period of 60
months or more.
The following rules apply separately to
each category of costs:
• The REIT can elect to deduct up to
$5,000 of such costs for the year the REIT
begins business operations.
• The $5,000 deduction is reduced (but not
below zero) by the amount the total costs

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exceed $50,000. If the total costs are
$55,000 or more, the deduction is reduced
to zero.
• If the election is made, any costs that are
not deductible must be amortized ratably
over a 180-month period beginning with the
month the REIT begins business operations.
In all cases, the amortization period
begins the month the corporation begins
business operations. For more details on the
election for business start-up and
organizational costs, see Pub. 535.
For more details on the election for
business start-up costs, see section 195 and
attach the statement required by
Regulations section 1.195-1(b). For more
details on the election for organizational
costs, see section 248 and attach the
statement required by Regulations section
1.248-1(c). Report the deductible amount of
these costs and any amortization on line 18.
For amortization that begins during the 2007
tax year, complete and attach Form 4562.
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.
• Employer credit for social security and
Medicare taxes paid on certain employee
tips.
• Credit for small employer pension plan
startup costs.
• Credit for employer-provided childcare
facilities and services.
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.
Line 9. Compensation of officers. 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.
Disallowance of deduction for
employee compensation in excess of $1
million. Publicly held REITs may not
deduct compensation to a “covered
employee” to the extent that the
compensation exceeds $1 million.
Generally, a covered employee is:
• The chief executive officer of the REIT (or
an individual acting in that capacity) as of
the end of the tax year; or

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• An employee whose total compensation

must be reported to shareholders under the
Securities Exchange Act of 1934 because
the employee is among the four highest
compensated officers for that tax year (other
than the chief 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. For details,
see section 162(m) and Regulations section
1.162-27.
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 (line
2);
• Form 8844, Empowerment Zone and
Renewal Community Employment Credit
(line 2);
• Form 8845, Indian Employment Credit
(line 4); and
• Form 8861, Welfare-to-Work Credit (line
2).
See the instructions for these forms for
more information. Do not include salaries
and wages 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 provided taxable fringe
benefits to its employees, such as
CAUTION 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:

!

And the vehicle’s
FMV on the first day of
the
lease exceeded:

The lease term
began:
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

After 12/31/02 but
before 1/1/04 . . . . . . .

$18,000

If the lease term began before January 1, 2003, 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 2008 will be
published in the Internal Revenue Bulletin in early 2008.

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 apportionment of
taxes on real property between seller and
purchaser.
Line 15. Interest.

!

Interest expense cannot be used to
offset interest income.

CAUTION

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, to purchase a portfolio investment
and to 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. For exceptions, see section 265(b).
• For cash basis taxpayers, prepaid interest
allocable to years following the current tax
year (for example, a cash basis calendar
year taxpayer who in 2007 prepaid interest

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allocable to any period after 2007 can
deduct only the amount allocable to 2007).
• 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:
• Interest on which no tax is imposed (see
section 163(j));
• Foregone interest on certain
below-market-rate loans (see section 7872);
and
• Original issue discount on certain
high-yield discount obligations. (See section
163(e) to figure the disqualified portion.)
Line 16. Depreciation. Besides
depreciation, include on line 16 the part of
the cost that the REIT elected to expense
under section 179 for certain property
placed in service during tax year 2007 or
carried over from 2006. See Form 4562 and
its instructions.
Line 18. Other deductions.
Penalties or fines paid to any
government agency or
CAUTION instrumentality because of a violation
of a law are not deductible. See Publication
535, Business Expenses, for additional
information.
Attach a schedule, 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 paid or incurred after
October 22, 2004, 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.
• Deduction for certain energy efficient
commercial building property. See section
179D.

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• Go Zone clean-up cost. The REIT may
deduct fifty percent of any qualified Go Zone
clean-up cost paid or incurred on or after
August 28, 2005, and before January 1,
2008. See section 1400N(f).
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 computed without regard
to the following:
• Any deduction for contributions.
• The special deductions on line 21b,
relating to dividends paid.
• The deduction allowed under section 249,
relating to any premium paid or incurred
upon the repurchase of a convertible bond.
• 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).
Substantiation requirements.
Generally, no deduction is allowed for any
contributions of $250 or more unless 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).
Note. For contributions of cash, check, or
other monetary gifts (regardless of the
amount), made in tax years beginning after
August 17, 2006, 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.
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, 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).
Form 5500, Annual Return/Report of
Employee Benefit Plan. File this form for a
plan that is not a one-participant plan (see
below).
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;

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• 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 for otherwise
nondeductible meals, travel, and
entertainment expenses is limited to the
amount treated as compensation. See
section 274(e)(2) and Notice 2005-45,
2005-24 I.R.B. 1228.
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.

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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 schedule 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 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. Add the amounts on lines 24d
through 24f and enter the total on line 24g.
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 24g.
This type of withholding is called “Backup
Withholding.” Show the amount withheld in
the blank space in the right-hand column
between lines 23 and 24g, and enter
“Backup Withholding.”
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 2007
as shown on the return or
• Its prior year’s tax (computed in the same
manner). See section 6655 for details and

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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),

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(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. For tax years beginning after
October 22, 2004, certain sales of timber
property by a timber REIT qualify as an
exception. 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 6. 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.

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Tax Rate Schedule
If taxable income (line 22, page 1) is:

Over —
$0
50,000
75,000
100,000
335,000
10,000,000
15,000,000
18,333,333

But not
over —

Tax is:

$50,000
15%
75,000
$ 7,500 + 25%
100,000
13,750 + 34%
335,000
22,250 + 39%
10,000,000
113,900 + 34%
15,000,000 3,400,000 + 35%
18,333,333 5,150,000 + 38%
----35%

Of the
amount
over —
$0
50,000
75,000
100,000
335,000
10,000,000
15,000,000
0

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 schedule 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 schedule
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.

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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 2007 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 2007
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–Qualifed Electric
Vehicle Credit
Use Form 8834, Qualified Electric Vehicle
Credit, to claim a credit for the purchase of a
new qualified electric vehicle.

Line 3c–General Business
Credit
Enter the REIT’s total general business
credit.
If the REIT is filing Form 8844,
Empowerment Zone and Renewal
Community Employment Credit, check the
“Form(s)” box, enter the form number in the
space provided, and include the allowable
credit on line 3c.
If the REIT is required to file Form 3800,
General Business Credit, check the “Form
3800” box and include the allowable credit
on line 3c. If the REIT is not required to file
Form 3800, check the “Form(s)” box, enter
the form number in the space provided, and
include on line 3c the allowable credit from
the applicable form listed below.
• Investment Credit (Form 3468).
• Work Opportunity Credit (Form 5884).
• Welfare-to-Work Credit (Form 8861).
• Low-Income Housing Credit (Form 8586).
• Disabled Access Credit (Form 8826).
• Indian Employment Credit (Form 8845).
• Credit for Small Employer Pension Plan
Startup Costs (Form 8881).
• Credit for Employer-Provided Child Care
Facilities and Services (Form 8882).
• General credits from an electing large
partnership (Schedule K-1 (Form 1065-B))
• Alternative Motor Vehicle Credit (Form
8910).
Also, see Form 3800 for a complete
listing of general business credits.

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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.

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

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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 gain 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, the REIT must pay tax on the
net recognized built-in gain during the
10-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 on page 12. 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 this 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 below.
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.
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 on Schedule D (Form 1120), line
1.
• Long-term capital gain as a long-term
capital loss on Schedule D (Form 1120), line
6.

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.

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, Part V, 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, Part II).

How to report
Attach a schedule 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

Built-in Gains Tax Worksheet (keep for your records)
a.
b.
c.
d.
e.
f.
g.
h.
i.

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

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a.
b.
c.
d.
e.
f.
g.
h.
i.

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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 2007. 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.

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• 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.
Privacy Act and Paperwork Reduction
Act Notice. We ask for the information on
this form to carry out the Internal Revenue
laws of the United States. You are required
to give us the information. We need it to
ensure that you are complying with these
laws and to allow us to figure and collect the
right amount of tax. Section 6109 requires
return preparers to provide their identifying
numbers on the return.
You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB control
number. Books or records relating to a form
or its instructions must be retained as long
as their contents may become material in
the administration of any Internal Revenue
law. Generally, tax returns and return
information are confidential, as required by
section 6103.
The time needed to complete and file this
form will vary depending on individual
circumstances. The estimated average time
is:

Recordkeeping . . . . . . . 59 hr., 33 min.
Learning about the law
or the form . . . . . . . . . . 24 hr., 18 min.
Preparing the form . . . . 43 hr., 5 min.
Copying, assembling,
and sending the form to
the IRS . . . . . . . . . . . . .

4 hr., 49 min.

If you have comments concerning the
accuracy of these time estimates or
suggestions for making this form simpler, we
would be happy to hear from you. You can
write to the Internal Revenue Service; Tax
Products Coordinating Committee;
SE:W:CAR:MP:T:T:SP; 1111 Constitution
Ave., NW; IR-6526; Washington, DC 20224.
Do not send the tax form to this office.
Instead, see the Where To File instructions.