Schedule J—Tax — Instruction 1120-REIT

Line 1a—Tax on REIT Taxable Income Most REITs figure their tax by multiplying taxable income by 21% (0.21). A member of a controlled group must use Schedule O (Form 1120) to figure its tax.

Line 1c Taxes are imposed for the failure to meet the requirements of the asset test and/or gross income test. To qualify for relief from the failure to meet these requirements, attach an explanation of why the REIT failed to meet the asset test and/or gross income test. Attach supporting schedules and a statement showing the computation of the amount of tax. Also, include a reason why the failure was due to reasonable cause and not willful neglect. See sections 856(c)(2), 856(c)(3), and 856(c)(4).

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

Line 1e 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 (see section 857(b)(7)(B));
Deductions that are improperly allocated between the REIT and its TRS (see section 857(b)(7)(C));
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)(D)); and

16 Instructions for Form 1120-REIT (2025)

Gross income of a TRS of a REIT attributable to services provided to, or on behalf of, the REIT (less the deductions properly allocable thereto) that is improperly allocated between the REIT and the TRS (see section 857(d)(7)(E)).

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

Line 1f—Tax Imposed Under Section 856(c)(7) Enter the tax imposed for relief provisions under section 856(c)(7) relating to failures to meet the requirements of the asset test of section 856(c)(4). See section 856(c)(7) for detailed information on the requirements for this relief provision.

If a tax is imposed under section 856(c)(7), attach a statement providing an explanation of why the REIT failed to meet the requirements of the asset test and a description of why such failure is due to reasonable cause and not willful neglect.

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

The REIT sets forth a description of each asset that causes the REIT to fail to satisfy the requirements of the asset test at the close of a quarter in a statement for the quarter attached to its timely filed Form 1120-REIT;
The failure must be due to reasonable cause and not due to willful neglect; and
The REIT either (a) disposes of the assets shown on the specified statement within 6 months after the last day of the quarter in which the REIT’s identification of the failure occurred (or such other time and in the manner prescribed by regulations); or (b) the requirements of the asset test of section 856(c)(4) are otherwise met within the specified time period.

In addition, if section 856(c)(7)(A) applies to a REIT for any tax year, the REIT must pay a tax that 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 21%.

Note. There is no tax imposed and you are not required to attach a schedule of assets to Form 1120-REIT for the de minimis 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)(iv) 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)(B)(iv) are otherwise met within the specified time period.

Line 1g—Tax Imposed Under Section 856(g)(5) Enter the tax imposed for relief provisions under 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(g)(5) for detailed information on the requirements for this relief provision.

If a tax is imposed for section 856(g)(5), attach a statement providing an explanation of why the REIT failed to meet the other qualification requirements under sections 856–859, and a description of why such failure is due to reasonable cause and not willful neglect.

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 1h—Section 1291 Tax from Form 8621 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, enter on line 1h the increase in taxes due under section 1291(c)(2) from Form 8621.

Do not include on line 1h any interest due under section 1291(c)(3). Instead, include the amount of interest owed on Schedule J, line 6z, Other taxes.

For more information on reporting the deferred tax and interest, see the Instructions for Form 8621.

Line 1i—Additional Tax under Section 197(f) A REIT that elects to recognize gain and pay tax on the sale of a section 197 intangible under the related person exception to the anti-churning rules should include any additional tax due on line 1i. See section 197(f)(9)(B)(ii).

Line 1j—Tax Adjustments from Form 8978 If the REIT is filing Form 8978, Partner’s Additional Reporting Year Tax, to report adjustments shown on Form 8986, Push Out to Partners Under IRC 6226(a)(2), they received from partnerships that have been audited and have elected to push out imputed underpayments to their partners, include any increase in taxes due (positive amount) from Form 8978, line 14, on Form 1120-REIT, Schedule J, line 1j. Attach Form 8978. If Form 8978, line 14, shows a decrease in tax, see the instructions for Schedule J, line 3d, later.

Line 1k—Amount from Form 4255, Part I, Line 3, Column (q) Enter on line 1k the tax that can be reduced by nonrefundable credits from Form 4255, Certain Credit Recapture, Excessive Payments and Penalties, Part l, line 3, column (q), if applicable. See the Instructions for Form 4255.

Line 1z—Other Chapter 1 Tax Enter on line 1z any other chapter 1 tax that can be offset or reduced by nonrefundable credits such as the foreign tax credit or general business credit.

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. territory, see Form 1118, Foreign Tax Credit—Corporations.

Line 3b—Credit From Form 8834 Enter any qualified electric vehicle passive activity credits from prior years allowed for the current tax year from Form 8834, Qualified Electric Vehicle Credit, line 7. Attach Form 8834.

Line 3c—General Business Credit Use Form 3800 to claim any general business credits. Enter on line 3c the allowable credit from Form 3800, Part II, line 38. See the Instructions for Form 3800.

Instructions for Form 1120-REIT (2025) 17

Line 3d—Adjustment from Form 8978 If the REIT is filing Form 8978 to report adjustments shown on Form 8986 they received from partnerships that have been audited and have elected to push out imputed underpayments to their partners, include any decrease in taxes due (negative amount) from Form 8978, line 14, in the total for Form 1120-REIT, Schedule J, line 3d. Attach Form 8978. If Form 8978, line 14, shows an increase in tax, see the instructions for Schedule J, line 1j.

Line 3z—Other Credits

Credit for prior-year minimum tax. Enter any allowable credit from Form 8827, Credit for Prior Year Minimum Tax—Corporations. Complete and attach Form 8827.

Bond credits from Form 8912. Enter the allowable credits from Form 8912, Credit to Holders of Tax Credit Bonds, line 12.

Line 6a—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. Enter on line 6a the tax from Schedule PH (Form 1120), Part lll, line 26.

Line 6b—Interest on Deferred Tax Liability Under Section 453A(c) Include any interest on deferred tax attributable to certain nondealer installment obligations (section 453A(c)).

Line 6c—Interest on Deferred Tax Liability Under Section 453(l) Include any interest on deferred tax attributable to certain dealer installment obligations under section 453(l).

Line 6d—Amount from Form 4255, Part 1, Line 3, Column (r) Enter on line 6d the tax that cannot be reduced by nonrefundable credits from Form 4255, Part 1, line 3, column (r), if applicable. See the Instructions for Form 4255.

Line 6e—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, and the REIT did not follow the procedures that would have prevented recapture of the credit, it may owe a tax. See Form 8611, Recapture of Low-Income Housing Credit.

Line 6z—Other Taxes Include on line 6z additional taxes and interest such as the following. Attach a statement showing the computation of each item included in the total for line 6z and identify the applicable Code section and the type of tax or interest.

Recapture of Indian employment credit. Generally, if an employer terminates the employment of a qualified employee less than 1 year after the date of initial employment, any Indian employment credit allowed for a prior tax year because of wages paid or incurred to that employee must be recaptured. For details, see Form 8845 and section 45A.
Recapture of new markets credit (see Form 8874 and Form 8874-B.
Recapture of employer-provided childcare facilities and services credit (see Form 8882).
Interest due on deferred gain (section 1260(b)).
Interest due under section 1291(c)(3). See Form 8621 and the Instructions for Form 8621.

Interest due under the look-back methods. If the REIT used the look-back method under section 460(b)(2) for certain long-term contracts, use Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, to figure the interest the REIT may have to include. See the Instructions for Form 8697.

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

Include the interest due under the look-back methods on line 6z.

Built-in Gains Tax and Worksheet

Built-in Gains Tax

If, on or after January 2, 2002, property of a C corporation becomes property of a REIT by either (a) the qualification of the C corporation as a REIT, or (b) the transfer of such property to a REIT, then the REIT will be subject to the built-in gains tax under section 1374 unless the C corporation elects deemed sale treatment on the transferred property. Generally, if the C corporation does not make this election for tax years beginning in 2020, the REIT must pay tax on the net recognized built-in gain during the 5-year period beginning on its first day as a REIT or the day it acquired the property. Special rules apply to conversion transactions on or after June 7, 2019, as well as conversion transactions with a related section 355 distribution. See Regulations section 1.337(d)-7 for details.

A REIT’s recognition period for conversion transactions that occur on or after August 8, 2016, and on or before February 17, 2017, is the 10-year period beginning on its first day as a REIT or the day the REIT acquired the property, as described in Temporary Regulations section 1.337(d)-7T(b)(2)(iii), as in effect on August 8, 2016. However, under the provisions of final Regulations section 1.337(d)-7(g)(2)(iii), a REIT may choose to apply a 5-year recognition period to conversion transactions that occur on or after August 8, 2016, and on or before February 17, 2017. See final Regulations section 1.337(d)-7 and Temporary Regulations section 1.337(d)-7T for details.

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

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

18 Instructions for Form 1120-REIT (2025)

Built-in Gains Tax Worksheet Keep for Your Records

a. Excess of recognized built-in gains over recognized built-in losses . . . . . . . . . . . . . . . . . . . . . . . . . . . a.

b. Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b.

c. Enter the net unrealized built-in gain reduced by any net recognized built-in gain for all prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c.

d. Net recognized built-in gain (enter the smallest of line a, b, or c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d.

e. Section 1374(b)(2) deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e.

f. Subtract line e from line d. If zero, enter -0- here and on line i . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f.

g. Enter 21% (0.21) of line f . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g.

h. Business credit and minimum tax credit carryforwards under section 1374(b)(3) from C corporation years (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h.

i. Tax. Subtract line h from line g (if zero or less, enter -0-). Enter here and include on line 6z of Schedule J. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i.

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 Built-in Gains Tax Worksheet to figure the built-in gains tax under Regulations section 1.337(d)-7 or 1.337(d)-6.

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 g. A REIT reporting built-in gain for a tax year ending before 2025 will enter 21% of line f.

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 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),

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.
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, Part l, line 21;
Form 1120-REIT, Part II, line 5; and
Form 2438, line 11. Subtract from the total the amount on Form 1120-REIT, line 22c. Enter the result on line b of the Built-in Gains Tax

Worksheet.

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 NOL 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

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

Line 8a—Total Tax before Deferred Tax Add lines 5 and 7. Enter the total on line 8a. 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 8a. See the Instructions for Form 8621, Part Vl.

Line 8b—Deferred Tax on Undistributed Earnings of a QEF Enter on line 8b the deferred tax on the REIT’s share of undistributed earnings of a qualified electing fund. See the Instructions for Form 8621, Part III.