IRS Form 8875 Guide: Taxable REIT Subsidiary Election Rules

Introduction: What is IRS Form 8875?

IRS Form 8875, titled Taxable REIT Subsidiary Election, is an official federal tax document governed by the Internal Revenue Service (IRS). It is filed under Section 856(l) of the Internal Revenue Code jointly by a Real Estate Investment Trust (REIT) and a corporate subsidiary.

Real Estate Investment Trusts are subject to strict legal restrictions that require the vast majority of their income to derive from passive real estate sources like rents and mortgage interest. Form 8875 allows a REIT to jointly elect with a corporate subsidiary to treat that corporation as a Taxable REIT Subsidiary (TRS), enabling the business to provide commercial tenant services and engage in activities that a REIT cannot perform directly.

Purpose of the Form

Under federal tax law, if a REIT directly provides non-customary services to tenants (such as concierge services, cleaning, parking management, or property development), its rental income can become disqualified, potentially causing the entity to lose its special REIT tax status.

Form 8875 solves this operational dilemma. When an election is made, the TRS operates as a separate, standard taxable C corporation that can deliver specialized services, manage third-party properties, or hold non-qualifying real estate assets. The TRS pays regular corporate income tax on its earnings, protecting the parent REIT’s tax-exempt dividend distribution structure.

Who Needs to File Form 8875?

Form 8875 must be filed jointly by the following parties wanting to create or terminate a TRS relationship:

• The Parent REIT: A trust, corporation, or association that has elected and maintains Real Estate Investment Trust status under Section 856.
• The Subsidiary Corporation: A domestic or foreign corporation in which the REIT directly or indirectly owns stock.
• Revoking Entities: A REIT and an existing TRS that choose to jointly revoke a previously approved Form 8875 election.

Who Is Exempt / Not Required to File?

You do not need to file Form 8875 under the following circumstances:

• Qualified REIT Subsidiaries (QRS): Wholly owned corporate subsidiaries that are treated as disregarded entities under Section 856(i) do not file Form 8875.
• Automatic 35% Sub-Tier Rule: If an existing TRS directly or indirectly owns more than 35% of the voting power or value of another corporation, that lower-tier corporation automatically becomes a TRS without filing a separate Form 8875.
• Standard Partnerships: Real estate partnerships or LLCs taxed as pass-through partnerships owned by the REIT.
• Non-REIT Entities: Standard corporations and partnerships that do not involve a parent Real Estate Investment Trust.

When to File

Form 8875 can be submitted at any time during the year, but the requested effective date must fall within specific statutory timing windows:

• Retroactive Window: The election cannot take effect more than 2 months and 15 days prior to the date the form is filed with the IRS.
• Prospective Window: The election cannot take effect more than 12 months after the date the form is filed.
• Default Effective Date: If no effective date is specified on the form, the election becomes effective on the exact date Form 8875 is filed.

Where and How to File

Form 8875 is a standalone election document and is never attached to the REIT’s annual Form 1120-REIT or the subsidiary’s Form 1120.

• Filing Method: Mail or fax the completed and jointly signed Form 8875 directly to the dedicated IRS Service Center where the parent REIT files its annual income tax return.
• Mailing Address: Send the form to the official IRS address as per instructions for corporate returns in your region (typically the IRS Centers in Ogden, Utah, or Kansas City, Missouri).
• Separate Election per Subsidiary: A separate Form 8875 must be submitted for each individual corporate subsidiary electing TRS status.

Step-by-Step Instructions to Fill Form 8875

Form 8875 is a single-page joint election document divided into four clear parts.

Part Number	Required Information	Instructions & Verification Rules
Part I	Real Estate Investment Trust Info	Enter the legal name, Employer Identification Number (EIN), and principal business address of the parent REIT.
Part II	Taxable REIT Subsidiary Info	Enter the legal corporate name, EIN, address, incorporation date, and state or country of incorporation for the subsidiary.
Part III	Description of Election	Check whether this is an initial election or a revocation. Enter the exact effective date (MM/DD/YYYY) within the allowable 2-month-15-day / 12-month window.
Part IV	Joint Signatures & Authorizations	Must be signed and dated by an authorized corporate officer of the REIT AND an authorized corporate officer of the TRS.

Required Documents and Information Needed Before Filling

Gather the following organizational records before completing Form 8875:

• REIT Status Verification: Prior Forms 1120-REIT and IRS documentation confirming active Real Estate Investment Trust status.
• Subsidiary Incorporation Articles: Official state certificates of incorporation proving legal formation.
• Subsidiary EIN Letter: Official IRS confirmation letter (Form CP575) establishing the subsidiary’s Employer Identification Number.
• Joint Corporate Authorizations: Board of Directors resolutions from both the REIT and the subsidiary approving the execution of the Form 8875 election.

Common Mistakes to Avoid

• Missing Joint Signatures: Having only the REIT officer sign. Form 8875 is legally void unless signed by authorized officers of both the REIT and the subsidiary corporation.
• Exceeding the 20% TRS Asset Limit: Under Section 856(c)(4)(B)(ii), securities held in one or more TRSs cannot exceed 20% of the total asset value of the REIT at the close of any quarter. Exceeding this cap threatens the REIT’s tax-exempt status.
• Direct Operation of Hotels and Healthcare: A TRS cannot directly operate or manage lodging or healthcare facilities; it must lease them to an “eligible independent contractor.”
• Non-Arm’s-Length Intercompany Transactions: Charging inflated management fees or non-market rents between the REIT and TRS, which triggers a punitive 100% excise tax under Section 857(b)(7).

Penalties for Non-Filing or Errors

Failing to properly execute Form 8875 can trigger catastrophic tax liabilities for real estate investment trusts:

• Loss of REIT Tax Status: If a subsidiary provides non-customary services without a valid Form 8875 in place, the parent REIT’s rental income becomes disqualified, which can cause full loss of REIT status and subject all REIT income to regular corporate taxation.
• 100% Section 857(b)(7) Excise Tax: The IRS assesses a flat 100% penalty tax on redetermined rents, redetermined deductions, or excess interest if transactions between the REIT and TRS are not priced at fair market value.
• Corporate Back Taxes: Unapproved subsidiary structures can lead to back taxes, failure-to-file penalties, and daily statutory compounding interest.

Related Forms and Schedules

• Form 1120-REIT: U.S. Income Tax Return for Real Estate Investment Trusts.
• Form 1120: U.S. Corporation Income Tax Return (filed annually by the Taxable REIT Subsidiary).
• Form 8832: Entity Classification Election (used if an LLC elects to be treated as a corporation before making a TRS election).
• Form 8869: Qualified Subchapter S Subsidiary Election.

Frequently Asked Questions (FAQs)

1. What is the difference between a TRS and a Qualified REIT Subsidiary (QRS)?

A Qualified REIT Subsidiary (QRS) is a 100% owned corporate subsidiary that is completely disregarded for tax purposes. A Taxable REIT Subsidiary (TRS) is a separate, taxable C corporation that can engage in commercial activities that a REIT is legally barred from doing directly.

2. Can a Taxable REIT Subsidiary pay dividends to the parent REIT?

Yes. A TRS can distribute after-tax earnings as dividends to the parent REIT. These dividends qualify as eligible income toward the REIT’s 95% gross income test.

3. What is the 20% asset limitation for TRSs?

By federal law, the total value of all securities held by a REIT in Taxable REIT Subsidiaries cannot exceed 20% of the REIT’s total asset value at the end of each calendar quarter.

4. Can a TRS directly run a hotel or hospital?

No. Under Section 856(l)(3), a TRS cannot directly operate or manage lodging or healthcare facilities. However, the TRS can lease these properties from the REIT and hire an independent third-party management company to run day-to-day operations.

5. How do a REIT and TRS revoke a Form 8875 election?

The election can be revoked at any time by filing a new Form 8875 with the “Revocation of prior election” box checked in Part III, signed jointly by authorized officers of both entities.

Conclusion: Key Takeaways

IRS Form 8875 provides Real Estate Investment Trusts with the operational flexibility needed to deliver modern tenant services, develop real estate, and manage hospitality assets through taxable corporate subsidiaries. To ensure full compliance, verify that TRS assets remain under the 20% portfolio cap, execute transactions at arm’s-length market rates, and submit Form 8875 with both authorized signatures within the statutory effective date window.