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(C), (D), (E), or (G). These amounts must be

that do not qualify as prohibited

Tax Rate Schedule

reported in Part I.

transactions. See section 856(j) for a special

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

rule regarding a shared appreciation

Line 4. Deductions. Deduct only those

mortgage. For tax years beginning after

expenses that have a proximate and primary

Of the

October 22, 2004, certain sales of timber

But not

amount

relationship to earning the income shown on

property by a timber REIT qualify as an

Over —

over —

Tax is:

over —

line 3. This includes:

•

exception. See section 857(b)(6)(D).

Depreciation on foreclosure property;

•

$50,000

15%

Interest paid or accrued on debt of the

Do not net losses from prohibited

50,000

75,000

$ 7,500 + 25%

50,000

REIT that is attributable to the carrying of

transactions against gains in determining

75,000

100,000

13,750 + 34%

75,000

the property;

the amount to enter on line 1. Enter losses

•

100,000

335,000

22,250 + 39% 100,000

Real estate taxes; and

from prohibited transactions on the

•

335,000

10,000,000

113,900 + 34% 335,000

Fees charged by an independent

appropriate line in Part I.

10,000,000

15,000,000 3,400,000 + 35% 10,000,000

contractor to manage such property.

15,000,000

18,333,333 5,150,000 + 38% 15,000,000

Line 2. Deductions. Deduct only those

Do not deduct general overhead and

18,333,333

- - - - -

35%

expenses that have a proximate and primary

administrative expenses in Part II.

relationship to the earning of the income

shown on line 1. Do not deduct general

Line 2e

overhead and administrative expenses in

Part III—Tax for Failure To

Part IV.

Enter the amount of the 100% REIT tax

imposed on the following:

Meet Certain

•

Income of a REIT for services provided to

Source-of-Income

Schedule A—Deduction

the REIT’s tenants that is improperly

included in rents from real property reported

Requirements

for Dividends Paid

by the REIT instead of being reported by the

TRS;

Section 856(c)(6) provides REITs with a

Lines 1 through 5. Section 561 (taking

•

Deductions that are improperly allocated

relief provision if they have failed to satisfy

into account sections 857(b)(8),

between the REIT to its TRS; and

the source-of-income requirements of

857(d)(3)(B), and 858(a)) determines the

•

Interest deductions of a TRS to the extent

sections 856(c)(2) and 856(c)(3). If section

deduction for dividends paid.

that interest payments to its REIT are in

856(c)(6) applies to a REIT for any taxable

Line 3. Dividends declared in October,

excess of a rate that is commercially

year, a tax is imposed on the REIT under

November, or December and payable to

reasonable.

section 857(b)(5).

shareholders of record in October,

All REITs must complete lines 1a through

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

November, or December are treated by the

8 of Part III to determine whether they are

exceptions.

REIT as paid on December 31 of that

subject to the tax imposed under section

calendar year. The REIT is then eligible for

857(b)(5). If line 8 is zero, the tax does not

Line 2f–Taxes Imposed Under

the deduction for dividends paid for the year

apply, and the REIT does not have to

Section 856(c)(7) and Section

the dividends are declared even though they

complete the rest of Part III. However, if line

are not actually paid until January of the

856(g)(5)

8 is greater than zero, the REIT is subject to

following calendar year.

this tax, and must complete the rest of Part

Enter the taxes imposed for the following

III to determine the amount of tax.

If the REIT declared dividends in any of

relief provisions:

•

those months and actually paid them in

Section 856(c)(7) relating to failures to

A REIT that has failed the

January, as discussed above, enter on line

meet the requirements of the asset test of

source-of-income requirements of sections

3 those dividends not already included on

section 856(c)(4); and

856(c)(2) and 856(c)(3) may avoid loss of its

•

lines 1, 2, and 4 of Schedule A.

Section 856(g)(5) relating to failures to

REIT status as a result of the failure if,

meet certain requirements under sections

following identification of its failure to meet

Line 6. If, for any tax year the REIT has net

856 through 859 (other than sections

the source-of-income requirements, the

income from foreclosure property (as

856(c)(2), 856(c)(3), and 856(c)(4)).

REIT sets forth a description of each item of

defined in section 857(b)(4)(B)), the

See section 856(c)(7) and 856(g)(5) for

its gross income described in sections

deduction for dividends paid to be entered

detailed information on the requirements for

856(c)(2) and 856(c)(3) in an attached

on line 6 (and on line 21b, page 1) is

these relief provisions and check the

schedule. In addition, its failure to meet the

determined by multiplying the amount on

appropriate box(es) for the tax(es) imposed

source-of-income requirements must be due

line 5 by the following fraction:

under them.

to reasonable cause and not due to willful

REIT taxable income (determined without regard to

neglect.

Failures to meet the asset test

the deduction for dividends paid)

For information on the relief provisions

requirements of section 856(c)(4) (other

REIT taxable income (determined without regard to

under sections 856(c)(7) and 856(g)(5), see

than de minimus failures). Under section

the deduction for dividends paid) +

the Instructions for Schedule J, line 2f.

856(c)(7)(A), a REIT may avoid loss of its

(Net income from foreclosure property minus the

REIT status as a result of certain failures to

tax on net income from foreclosure property)

meet the asset test requirements of section

Part IV—Tax on Net

856(c)(4) if, following identification of the

failure, each of the following requirements

Income From Prohibited

Schedule J—Tax

are met:

•

The REIT sets forth a description of each

Transactions

Computation

asset that causes the REIT to fail to satisfy

Section 857(b)(6) imposes a tax equal to

the requirements of the asset test at the

100% of the net income derived from

Line 1

close of a quarter in a schedule for the

prohibited transactions. The 100% tax is

quarter attached to its timely filed Form

A member of a controlled group must check

imposed to prevent a REIT from retaining

1120-REIT;

the box on line 1 and complete and attach

•

any profit from ordinary retailing activities

The failure must be due to reasonable

Schedule O (Form 1120). See Schedule O

such as sales to customers of condominium

cause and not due to willful neglect; and

(Form 1120) and its instructions for more

•

units or subdivided lots in a development

The REIT either: (a) disposes of the

information.

tract.

assets shown on the specified schedule

Line 1. Gain from sale or other

within 6 months after the last day of the

Line 2a–Tax on REIT Taxable

disposition of property. Include only gain

quarter in which the REIT’s identification of

Income

from the sale or other disposition of property

the failure occurred (or such other time and

described in section 1221(a)(1) that is not

Most REITs figure their tax by using the Tax

in the manner prescribed by regulations); or

foreclosure property and that does not

Rate Schedule below. A member of a

(b) the requirements of the asset test of

qualify as an exception. See section

controlled group must use Schedule O

section 856(c)(4) are otherwise met within

857(b)(6)(C) for information on certain sales

(Form 1120) to figure its tax.

the specified time period.

-11-

Instructions For Form 1120-Reit - Internal Revenue Service Of Department Of The Treasury - 2007 Page 11

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