1120-REIT: U.S. Income Tax Return for Real Estate Investment Trusts

Reporting taxes for Real Estate Investment Trusts (REITs) can be complex, with strict eligibility requirements and detailed reporting across assets, income, and distributions.

Properly filing Form 1120-REIT ensures compliance with IRC rules for REIT status and pass-through tax treatment, saving substantial taxes for investors.

In this comprehensive guide, we will demystify Form 1120-REIT by outlining key sections, instructions, and best practices for REIT tax reporting and compliance.

Introduction to Form 1120-REIT and REIT Tax Reporting

Form 1120-REIT is the U.S. Income Tax Return for Real Estate Investment Trusts (REITs). This form is filed by qualified REITs to report income, gains, losses, deductions, credits, and to figure their income tax liability. Understanding Form 1120-REIT is key for proper REIT tax reporting.

Understanding Form 1120-REIT for REIT Taxation

Form 1120-REIT plays a vital role in the special tax treatment of REITs under the Internal Revenue Code (I.R.C.). By filing this form, REITs can take advantage of corporate tax exemptions on distributed income as long as they meet asset, income, distribution, and shareholder requirements. Accurately filing taxes each year on Form 1120-REIT allows a business to maintain its REIT status.

Eligibility and Filing Requirements for REITs

To qualify for the tax benefits of a REIT, a business must annually elect REIT status and meet certain thresholds. As per I.R.C. 856, a REIT must derive at least 75% of gross income from real estate sources and distribute at least 90% of taxable income to shareholders as dividends. REITs that meet these and other tests can make a REIT election by filing Form 1120-REIT.

Navigating the Instructions for Form 1120-REIT

The IRS provides comprehensive instructions for filling out Form 1120-REIT. Key sections cover the REIT asset tests, income and distribution requirements, calculations for taxes owed, reporting of capital gains, and details on attaching supporting statements. Following these line-by-line directions helps ensure full compliance and smooth processing.

Key Information Reported on Form 1120-REIT

As a tax return, Form 1120-REIT requires REITs to report pertinent details like gross income, allowable deductions, taxable income, income tax liability, tax payments, deferred tax assets, dividends paid to shareholders, capital gains/losses, and more. Maintaining detailed records facilitates accurate reporting.

Do you file IRS Form 1120 REIT?

Real estate investment trusts (REITs) that meet certain requirements must file IRS Form 1120-REIT. This form is used to report income, gains, losses, deductions, credits, and to figure the income tax liability of a REIT.

To file Form 1120-REIT, the following conditions must be met:

The entity must elect to be treated as a REIT for the tax year by properly filing Form 1120-REIT. This election, once made, applies to subsequent tax years unless terminated or revoked.
At least 100 shareholders must exist.
No more than 50% of the shares can be held by 5 or fewer individuals during the last half of the tax year.
At least 75% of gross income must be from rents, interest, dividends, and gains on the sale of securities and real property.
At least 95% of income must be distributed to shareholders annually.

So in summary, REITs meeting the above criteria can benefit from a special tax structure by filing Form 1120-REIT. This allows income to flow through to investors without double taxation at the corporate level.

Some key advantages of filing as a REIT include:

No tax paid at entity level if distribution requirements are met
Access to capital markets and greater liquidity
Diversification for shareholders
Expert management in real estate investments

In exchange for these benefits, REITs take on fiduciary responsibilities to shareholders. So any entity wishing to be taxed as a REIT must file Form 1120-REIT and meet ongoing qualifications.

Where do I put REIT income on my tax return?

REIT dividends and capital gains are reported on your personal tax return. Specifically:

Ordinary REIT dividends are reported on Form 1040, line 3b. These are included in your total ordinary dividends for the year.
Qualified REIT dividends are reported on Form 1040, line 3a. These qualify for the lower long-term capital gains tax rate.
Capital gains distributions from the sale of REIT shares are reported on Schedule D and Form 1040. These may be taxed at lower long-term capital gains rates depending on your holding period.

When you receive your Form 1099-DIV from your REIT investments, it will specify the amount of ordinary dividends, qualified dividends, and capital gains distributions to help you report accurately. Box 5 contains the Section 199A dividends eligible for a 20% deduction.

Be sure to report your REIT income correctly on your tax return to take full advantage of the tax benefits these investments can provide. Consult IRS Publication 535 and the instructions for Forms 1040 and 1120-REIT for specifics on REIT taxation. Tracking your cost basis and holding periods is also key to optimal REIT tax reporting.

How is a REIT treated for tax purposes?

A REIT (real estate investment trust) receives special tax treatment under the Internal Revenue Code. The key points regarding taxation of REITs are:

A REIT is taxed as a regular corporation, but qualifies for a special deduction for dividends paid to shareholders. This eliminates "double taxation" at both the corporate and shareholder levels.
To qualify for this special tax treatment, a REIT must meet various requirements related to its ownership, assets, income sources, and distribution of earnings. These are outlined in IRC Section 856.
Provided a REIT meets the qualification rules and distributes at least 90% of its taxable income as shareholder dividends, it is entitled to deduct those dividends paid. This results in no taxable income at the corporate level.
However, a REIT will pay a 35% tax rate at the corporate level on any net income from "foreclosure property" that exceeds certain thresholds outlined in the tax code.

So in summary, a REIT avoids double taxation like a pass-through entity, but only by meeting ongoing qualification tests and distributing the vast majority of earnings to investors annually. This enables tax-efficient investing in real estate without a corporate tax burden.

Where is REIT income reported?

If you own shares in a real estate investment trust (REIT), you must report any dividends or capital gains distributions you receive from the REIT on your personal tax return.

Reporting REIT Dividends

Any ordinary dividends you receive from a REIT are reported to you and the IRS on Form 1099-DIV. The dividends will be included in Box 1 of Form 1099-DIV. You must then report these ordinary REIT dividends as ordinary income on your personal income tax return.

Reporting Qualified REIT Dividends

Some dividends paid by a REIT may qualify for the lower long-term capital gains tax rate. These qualified dividends are included in Box 1b of Form 1099-DIV and can be reported on your personal tax return accordingly.

Reporting Capital Gains Distributions

If you receive capital gains distributions from the sale of REIT assets, these are reported to you on Form 1099-DIV and included in Box 2a. You must report these capital gains distributions as long-term capital gains income on Schedule D of your personal income tax return.

So in summary, REIT dividends and capital gains distributions are reported to shareholders on Form 1099-DIV, with different boxes indicating the type of income. You must then report the proper amounts on your personal tax return, either as ordinary REIT dividends or capital gains income. Failing to report REIT income correctly can lead to penalties and interest from the IRS.

Comprehensive Breakdown of Form 1120-REIT Sections

Form 1120-REIT is the U.S. Income Tax Return filed by real estate investment trusts (REITs). This section provides an overview of the key components REITs must report.

Income Reporting for REITs

REITs must report all sources of gross income, including:

Rental income
Interest and dividend income
Capital gains
Other income

Applicable deductions like operating expenses, interest, taxes, and depreciation are subtracted. The net amount is taxable income for REITs.

Calculating Tax Liability and Capital Gains for REITs

After calculating taxable income, REITs determine their total tax liability. Tax credits can reduce liability, while estimated tax payments are credited. The net amount due or refundable is reported.

REITs passing capital gains to shareholders use Form 2438. The form details:

Total capital gains
Per share capital gains distribution
Shareholder reporting information

REIT Asset and Equity Reporting on Balance Sheets

REITs must provide beginning and ending year balance sheets, including:

Total assets like property, equipment, investments
Total liabilities such as accounts payable, debt
Shareholders' equity

Changes in equity accounts tie to income and distribution amounts.

Meeting REIT Qualification Tests

To qualify as a REIT, companies must meet income and asset tests per I.R.C. 856:

At least 75% of gross income must be rents or other real estate sources
At least 95% of gross income must come from rents, dividends, interest or other passive sources
At least 75% of assets must support real estate activities

REITs failing these tests may lose preferential tax treatment.

Disclosure of Taxable REIT Subsidiary Information

REITs must disclose ownership in taxable REIT subsidiaries, providing:

Name and EIN of each subsidiary
Percentage of voting stock owned by the REIT

This information determines if subsidiary income is subject to REIT rules.

Detailed Instructions for Completing and Filing Form 1120-REIT

This section covers key information needed to properly complete and file Form 1120-REIT, including how to efile a REIT return.

Attachments and Supporting Documentation for Form 1120-REIT

REITs must attach supporting statements related to deferred income, FAS 109 expenses, book-tax reconciliation, and more. Specifically:

Schedule D (Form 1120) - Used to report sales, exchanges, or dispositions of capital assets. This helps determine capital gains and losses.
Schedule J (Form 1120) - Used to compute accumulated earnings tax and personal holding company tax.
Schedule K (Form 1120) - Used to report shareholder's shares of income, credits, deductions, etc.
Schedule L (Form 1120) - Used to report balance sheets per books, reconciliation of income per books with income per return, and analysis of unappropriated retained earnings per books.
Schedule M-1 (Form 1120) - Used to reconcile income (loss) per books with income per return. Common reconciling items include tax-exempt interest income, meals and entertainment expenses, depreciation, charitable contributions, and more.

Other attachments may include book-tax reconciliation statements, FAS 109 expense reports, computations related to IRC Section 965 income, and more as needed to support specific line items on the return.

Properly Signing and Authenticating the REIT Return

The return must be signed by:

President, vice president, treasurer, assistant treasurer, chief accounting officer, or
Any other corporate officer (such as tax officer) authorized to sign.

If an employee of the corporation completes Form 1120-REIT, the paid preparer space should be completed with their information. Signing the return as a paid preparer can expose the preparer to certain liabilities, and requires including a PTIN.

Filing Deadlines and Extension Procedures for REITs

The filing deadline for Form 1120-REIT is on or before the 15th day of the 4th month following the close of the tax year. For calendar year taxpayers, this is April 15. An automatic 6-month extension until October 15 can be obtained by filing Form 7004 by the original due date. This extension is only for filing, not payment, so estimated tax payments should still be made by April 15.

Form 1120-REIT must be filed with the Internal Revenue Service Center in Ogden, UT (regardless of location). The mailing address is:

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

Electronic Filing Options for REIT Returns

Form 1120-REIT can be e-filed through IRS e-file partners using IRS e-file for Business Returns. Most major tax preparation software packages support efiling business returns. REITs can also authorize reporting agents or transmitters to efile on their behalf.

Some key requirements for efiling business returns include:

Internet connection with minimum speed of 28.8 kbps
Browser that supports S/MIME security and encryption standards
Software approved by IRS testing for forms

Efiling offers benefits like faster processing, improved accuracy, and faster refunds when applicable.

Exploring the Tax Advantages and Obligations of REITs

This section outlines some of the beneficial tax treatments REITs receive under the tax code, as well as their specific tax obligations.

Tax Reform Guidance for 1120 Filers and Implications for REITs

The Tax Cuts and Jobs Act of 2017 brought significant changes to the tax code, including a reduction of the corporate tax rate from 35% to 21%. While REITs do not pay corporate taxes as pass-through entities, these reforms still impacted REIT tax reporting in certain ways.

Specifically, REITs must now provide guidance to shareholders on the effect of tax reform changes related to the 20% qualified business income deduction under section 199A and deductions for net operating losses. REITs also must indicate whether they have assets that fall under the deemed repatriation rules of IRC section 965, which may increase the amount of dividends paid to shareholders.

Overall, recent tax reforms have aimed to spur business investment and job creation in the United States. For REITs and their investors, new tax guidance indicates how these changes specifically impact pass-through income, losses, and deemed repatriation reporting.

Pass-Through Deductions and Losses for REIT Investors

One major tax advantage of REITs is that they avoid double taxation by passing income and deductions directly to shareholders. This means shareholders can use REIT losses to offset taxable income from other sources.

Specifically, net operating losses from a REIT can pass through to investors as non-separately stated losses. These can then offset up to 80% of the investor's taxable income in a given year, with the remainder carrying forward indefinitely. This pass-through treatment provides a significant tax benefit.

REITs must indicate on Form 1120-REIT the total amount of non-separately stated losses passed through to investors, allowing them to properly apply these deductions when filing their own tax returns.

Capital Gains Tax Considerations for REIT Distributions

Under the tax code, REIT shareholders pay taxes on dividends from ordinary income at their individual tax rates. However, REITs can also earn and distribute capital gains from the sale of assets, which receive preferential tax rates.

Specifically, long-term capital gains distributed by a REIT are taxed at a maximum 20% rate for investors falling in the highest tax bracket. This single level of taxation compares favorably to a corporate structure, in which capital gains would be taxed once at the entity level and again upon distribution to shareholders.

On Form 1120-REIT, REITs must break out the composition of distributions between ordinary dividends, capital gain dividends, and return of capital. This allows investors to assess capital gains tax implications and determine cost basis.

As part of tax reform, IRC Section 965 deemed that US companies must repatriate past earnings from their foreign subsidiaries, whether or not funds were actually brought back to the US. This can impact REIT dividend payments.

Specifically, if a REIT owns 10% or more of a foreign corporation, it must include its accumulated post-1986 deferred foreign income as part of its IRC 965 income amount. All or a portion of this income may need to be included in dividends paid to REIT investors.

On Form 1120-REIT, REITs must report their 965 income inclusion amount and provide supporting detail around related deductions and foreign tax credits. They also must indicate whether any of their dividend distributions relate to IRC 965 income inclusion amounts. This reporting provides clarity to investors on the composition of REIT dividend payments.

Tax Reporting for REITs: Compliance and Best Practices

All Revisions for Form 1120-REIT and Keeping Up-to-Date

It is critical for REITs to stay up-to-date on all revisions for Form 1120-REIT and related IRS publications. The tax code changes frequently, and REITs must adapt their compliance procedures accordingly. Monitoring IRS.gov for new releases and subscribing to email updates can help ensure your REIT is using the most current forms and understands all reporting requirements. Key items to review with each update include changes to:

Tax rates
Allowable deductions
Instructions for various lines and schedules
Reporting requirements for new asset classes

Staying current reduces filing errors, speeds up processing times, and keeps your REIT compliant. It also allows you to take advantage of new tax advantages as regulations evolve.

Understanding and Utilizing Form 2438 for REITs

Form 2438 enables REITs to designate undistributed capital gains realized during the year. Without filing this form, all capital gains would be treated as distributed to shareholders whether actually paid out or not.

Proper use of Form 2438 is essential for REITs to achieve fair taxation. It allows deferring taxes on gains retained for future investments. Key aspects include:

File by the due date of Form 1120-REIT
Report both short-term and long-term capital gains realized but not distributed
Include gains from sale of assets plus other income sources
Distributions reported on Form 1099-DIV must match Form 2438

Following Form 2438 instructions accurately provides significant tax advantages specific to REITs.

REIT Compliance with Publication 535, Business Expenses

IRS Publication 535 details allowable business expense deductions. REITs must comply with these guidelines when reporting expenses such as:

Operational and maintenance costs
Management, advisory, and professional fees
Marketing, advertising, and promotional costs
Interest paid on debts and loans
Depreciation of real estate assets

Monitoring updates to Pub. 535 ensures proper classification and reporting of all business expenses on Form 1120-REIT. Key factors include:

Ordinary vs capital expenditures
Active vs passive loss rules
Recovery periods for various expenses

Referencing Pub. 535 reduces the chance of errors and having deductions challenged upon review.

Issuing Form 1099-DIV, Dividends and Distributions

REITs must furnish Form 1099-DIV to any shareholder receiving over $10 in dividends or capital gains distributions. Key requirements include:

File by February 28 of the following year
Report name, address, TIN, and investment amounts
Classify dividends as ordinary or capital gains
Note federal/foreign tax withheld
Provide instructions for shareholder tax filing

Properly categorizing distributions provides clarity for shareholders and consistency with the REIT’s Form 2438 and 1120-REIT. Maintaining organized records facilitates accurate future reporting.

Conclusion: Key Takeaways on Form 1120-REIT and REIT Taxation

Form 1120-REIT provides critical details for the IRS to verify REIT qualifications and ensure proper income tax reporting. Here are some key takeaways:

To receive beneficial REIT tax treatment, companies must meet income, asset, distribution, and shareholder requirements laid out in IRC 856. Form 1120-REIT allows the IRS to validate compliance.
Key sections of Form 1120-REIT cover total income, deductions, tax and credits, income/asset tests, tax under alternative minimum tax, and more. Following instructions carefully is important.
Filing as a qualifying REIT can provide tax advantages like avoiding corporate level income tax. Instead, income flows through to shareholders similar to a partnership. However, REITs must distribute at least 90% of taxable income as shareholder dividends each year.
Recent tax reforms and IRS guidance have changed some technical aspects of REIT reporting requirements. Checking for form updates and referencing Publication 535 for business expenses can help ensure accurate tax calculations and reporting.

In summary, properly filing Form 1120-REIT is essential for REITs to verify their status, report income and distributions, and receive beneficial tax treatment under IRC 856. Keeping current with latest IRS rules and instructions supports accurate REIT tax reporting.