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 (25% for tax years beginning after July 30, 2008, and no later than December 31, 2017) 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)), and

• Have been treated as a REIT for all tax years beginning after February 28, 1986, or

• Had, at the end of the tax year, no accumulated earnings and profits from any tax year that it was not a REIT.

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.

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.

Restrictions on tax-free spinoffs from REITs. For distributions after December 6, 2015, a REIT is generally ineligible to participate in a tax-free spinoff as either a distributing or controlled corporation under section 355. This general rule does not apply if both the distributing corporation and the controlled corporation are REITs immediately after the distribution. Also, a REIT may spin off a TRS if the following apply.

• 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.

• The REIT has had control (as defined in section 368(c) applied by taking into account stock owned, directly and indirectly, including through partnerships, by the REIT) of the TRS at all times during such period.

• The distributing corporation has been a REIT at all times during the 3-year period ending on the date of distribution;

• The controlled corporation has been a TRS of the REIT at all times during such period; and

2 Instructions for Form 1120-REIT (2025)

A controlled corporation is treated as meeting the control requirements if the stock of the corporation was distributed by a TRS in a transaction to which section 355 applies and the assets of the corporation consist solely of the stock or assets held by one or more TRSs of the distributing corporation meeting the control requirements described above.

If a corporation that is not a REIT was a distributing or controlled corporation with respect to any distribution to which section 355 applied, the corporation will not be eligible to make a REIT election for any tax year beginning before the end of the 10-year period beginning on the date of such distribution. See sections 355(h) and 856(c)(8) for more details.