In real estate, TRS stands for Taxable REIT Subsidiary, a regular C corporation owned by a Real Estate Investment Trust that handles business activities the REIT itself cannot conduct without jeopardizing its special tax status. The REIT keeps its favorable pass-through treatment on rents and mortgage interest; the TRS absorbs the messier, more active income streams and pays corporate tax on them at 21%. Think of it as a pressure valve built into the REIT rules.
Why REITs Need a Subsidiary in the First Place
A REIT gets its tax advantages by staying inside a narrow lane. At least 75% of its gross income has to come from real estate sources like property rents, mortgage interest, and gains from selling real property. At least 95% has to come from those sources plus other passive income like dividends and interest. And services provided to tenants have to be limited to what the tax code treats as “customary” for a landlord.
The problem is that modern real estate businesses want to do more than passively collect rent. Apartment operators want to offer concierge services. Shopping center owners want to run valet parking. Hotel owners obviously need someone to actually run the hotel. Developers want to build and sell condos. Any of these activities, done directly by the REIT, can generate “bad” income that fails the tests or triggers punitive taxes.
The TRS solves that by sitting next to the REIT as a taxable corporation. The active business happens inside the TRS, the income stays on the TRS’s books, and the REIT stays clean.
What a TRS Actually Does
The most common role is providing non-customary services to tenants. A concierge desk in a residential tower, room service in a hotel, valet parking at a mall — the TRS runs the operation and collects the revenue. If the REIT tried to bill tenants for these directly, the income could poison its 95% test.
Beyond tenant services, TRSs frequently handle property development, brokerage, and third-party management for buildings the REIT doesn’t own. They also serve as a workaround for the REIT’s 100% prohibited transaction tax, which hits net profit from selling property held as inventory rather than investment. A REIT that moves development or condo-conversion projects into a TRS can use safe harbor protections to avoid that penalty, because the TRS, not the REIT, is the seller.
The Hotel and Healthcare Rule
One firm boundary sits inside the TRS regime. A TRS cannot directly operate or manage a hotel or a qualified healthcare facility. The workaround, which the tax code specifically contemplates, is a three-party structure: the REIT owns the building, leases it to the TRS, and the TRS hires an “eligible independent contractor” to run day-to-day operations. That contractor has to already be in the business of managing similar properties for unrelated parties when it signs on. The same arrangement applies to nursing homes and other qualified healthcare properties.
A TRS also can’t hold the brand license under which a hotel operates, with one narrow exception: it can be the franchisee if the property is owned by the TRS or leased to it from the REIT.
How a TRS Is Taxed
A TRS pays the standard 21% federal corporate income tax on its earnings. Unlike its parent REIT, which deducts dividends paid to shareholders and typically owes little federal tax at the entity level, a TRS gets no dividends-paid deduction. It files its own corporate return like any other C corporation.
State corporate income tax stacks on top of that. Rates run from 0% in states with no corporate income tax up to roughly 11.5% in the highest-tax states, and some states without a traditional corporate income tax impose gross receipts taxes instead. The combined burden is real, which is why REITs generally push only the activities they have to into the TRS and keep everything else at the REIT level.
The 25% Asset Cap
A REIT can’t simply move most of its business into TRSs to escape the income tests. At the close of each calendar quarter, the total value of securities in all of a REIT’s TRSs cannot exceed 25% of the REIT’s total asset value. That cap was raised from 20% for tax years beginning after 2025. If asset values shift and the REIT slips over the line, it has 30 days after the close of the quarter to fix the imbalance without losing REIT status.
Dividends flowing from the TRS up to the REIT count toward the 95% income test but not the 75% test. A REIT that leans too heavily on TRS dividends can accidentally fail the 75% test while comfortably passing the 95% test, so the mix of income sources matters as much as the total.
The 100% Excise Tax on Sweetheart Deals
The IRS knows that a REIT and its TRS have every incentive to shift income between them. If the REIT charges its TRS above-market rent, taxable income moves from the 21% side to the 0% side. If the TRS pays the REIT above-market interest on an intercompany loan, the same thing happens. To shut this down, the code imposes a 100% tax on “redetermined rents,” “redetermined deductions,” “excess interest,” and “redetermined TRS service income” — the portions of intercompany payments that exceed what unrelated parties would agree to.
One hundred percent. Not the regular corporate rate. The IRS taxes the entire inflated portion away.
Several exceptions can keep the excise tax from applying:
- A de minimis rule: if the impermissible service income from a property stays below 1% of all income from that property, the tax doesn’t apply.
- Comparably priced services: if the TRS provides similar services to unrelated third parties at comparable prices, tenant service income escapes the tax.
- Separately charged services: if the service is billed separately from rent, and tenants who don’t use the service pay comparable base rent to those who do, the tax doesn’t apply.
- A 150% cost test: if the TRS’s gross income from the service is at least 150% of its direct cost of providing it, the tax is waived.
The IRS can also waive the excise tax if the REIT demonstrates that rents were set at arm’s length despite TRS involvement. The burden of proof sits with the REIT, so contemporaneous documentation of how intercompany prices were determined matters far more than any after-the-fact explanation.
All of this sits on top of the general transfer pricing rules that already let the IRS reallocate income and deductions between related parties whenever the reported numbers don’t reflect economic reality. The agency doesn’t need to prove intent to evade tax; if the pricing is off, it can adjust regardless.
How the TRS Election Is Made
Creating a TRS is more procedural than complicated. The REIT owns stock in a corporation, and both entities jointly elect TRS status by filing IRS Form 8875. There is no minimum ownership percentage, though in practice REITs typically own 100% of their TRS subsidiaries for control. If the subsidiary is organized as an LLC, it first has to elect corporate tax treatment on Form 8832 before the TRS election can take effect.
Form 8875 is signed by an officer of the REIT and an officer of the TRS and mailed to the IRS in Ogden, Utah. It doesn’t get attached to either entity’s tax return. The effective date can’t reach back more than 2 months and 15 days before the filing date and can’t extend more than 12 months into the future; if no date is specified, the election takes effect when the IRS receives the form. Once made, the election is irrevocable unless both parties jointly consent to revoke it.
There is also an automatic cascade rule worth knowing. If a TRS itself owns more than 35% of the voting power or value of another corporation’s stock, that second corporation automatically becomes a TRS of the parent REIT. When that threshold gets crossed, the REIT has to file a copy of its original Form 8875 marked “Automatic Taxable REIT Subsidiary” within 30 days after the end of the quarter.
Put together, the TRS is a deliberate compromise built into the REIT rules: enough flexibility to run a modern real estate business, with enough friction — a corporate tax bill, an asset cap, and a 100% penalty on self-dealing — to keep the REIT itself in its lane.