Must a partnership withhold state income tax for its REIT partner, and how is each state's exemption claimed?

The fact pattern, and why the default is corporate-rate withholding

An operating partnership, a Delaware LLC taxed as a partnership, holds an investment management group's assets. Its partners are the REIT partner (about 90 percent), the management corporation (a C corporation holding about 5 percent) and the executive partnership, an upper tier through which senior executives hold the rest. Below it sit lower-tier LLCs and LPs holding real estate, loans and fund interests. The operating partnership files partnership returns in about 30 states and makes nonresident withholding or composite return payments for its partners where required. In the year of sale it sells a lower-tier operating platform for a gain of about $900 million, which enlarges every state's withholding base.

The REIT partner is the partner that matters, because it holds most of the income. In the example, the operating partnership's Virginia-source income for the year is $20 million. The REIT partner's 90 percent share is $18 million, and at the 5 percent rate stated in Virginia's 2025 Form 502 instructions, withholding on it would be $900,000. In New Jersey, with $10 million of New Jersey income, the REIT partner's share of $9 million at the 9 percent rate N.J.S.A. 54:10A-15.11(a)(1) sets for nonresident corporate partners would be $810,000. A REIT that distributes its income takes a dividends paid deduction and often owes little state tax of its own, so withholding of that size is cash the REIT recovers only as a credit or refund on its own return, a year or more later.

A REIT qualifies for its federal status in part by distributing: its deduction for dividends paid must equal or exceed 90 percent of its REIT taxable income, computed without that deduction and excluding net capital gain (26 U.S.C. 857(a)(1)). It remains a corporation. Withholding statutes are written around partner types (individual, corporation, pass-through entity, exempt organization), and a REIT falls in the corporation column unless a state writes it out. The relief therefore comes from three places: a REIT-specific carve-out, a regime that never reaches corporate partners, or a certificate or condition the REIT itself satisfies.

States that carve out a REIT partner

Maryland. Maryland's pass-through entity tax, when paid on the shares of nonresident and nonresident entity members under Tax-General section 10-102.1(b)(2)(i), "does not apply with respect to the direct or indirect distributive share or pro rata share of a member that is: (i) a real estate investment trust as defined by § 856 of the Internal Revenue Code" (section 10-102.1(f)(2)). The exclusion holds only where the entity has not elected under section 10-102.1(b)(2)(ii) to pay the tax on all members' shares; an electing entity loses it. Maryland defines its REIT by federal cross-reference and imposes no distribution or captive condition. No certificate appears in the statute; the partnership excludes the REIT's share from the computation.

Utah. Utah's withholding rule provides that a pass-through entity "is not required to withhold a tax on behalf of a pass-through entity taxpayer" that is "a real estate investment trust if all of the earnings of the real estate investment trust are distributed to the owners of the real estate investment trust" (Utah Admin. Code R865-9I-13(5)(a)(ii)). The condition is stricter on its words than the federal 90 percent test: a REIT that retains part of its earnings, including retained capital gain, may not meet "all of the earnings," a term the rule does not define. The Tax Commission's Publication 68 (rev. 10/18) applies the rule in its Example 3, in which a partnership withholds for its S corporation partner but "does not need to withhold Utah tax on behalf of its REIT partner." Neither the rule nor the publication prescribes a REIT certificate; the Schedule N waiver box is a different instrument, for partners "who filed and paid tax on the Utah income from this partnership" (2025 TC-65 instructions).

Virginia. The statute's exemptions are narrow. Va. Code section 58.1-486.2(C) excuses withholding for a nonresident corporation exempt from the corporate income tax only "if the corporation, by reason of its purpose or activities, is exempt from paying federal income taxes on the corporation's Virginia source income" (subdivision C.2), for an undue hardship petition the Tax Commissioner approves in writing (C.3), and for entities leasing four or fewer dwelling units (C.4). A REIT is not exempt from federal income tax by reason of its purpose, and section 58.1-401's list of exempt corporations does not mention REITs. The exclusion appears instead in the Department's 2025 Form 502 instructions, which list among the nonresident owners for whom no withholding is required "(4) real estate investment trusts (REITs) that are not Captive REITs." The same instructions direct an entity claiming an exception to "enclose a list of all of the nonresident owners that are claiming an exception to the Form 502." The relief rests on the Department's published position rather than the statute's text, and it does not reach a captive REIT; the management corporation, with no comparable exclusion, is withheld on at 5 percent.

Indiana. Indiana requires a partnership to withhold at the corporate rate on Indiana-source amounts paid or credited to nonresident corporate partners, and the Department's IT-65 booklet (tax year 2025) gives exception code 07: "Enter this code if the partner is a real estate investment trust (REIT)," followed by "However, do not enter this code if the REIT is a captive REIT required to add back its dividends paid." The code is entered on Schedule Composite-COR, and "The codes 03 through 13 will require a signed IN-COMPA from the partner."

Alabama. Alabama's instrument is a composite payment, not withholding, required by Ala. Code section 40-18-24.2 at 5 percent, the maximum rate under section 40-18-5. The Department's 2025 Form PTE-C instructions list as exempt "Real Estate Investment Trusts that are not captive REITS as defined by Ala. Code Section 40-18-1(5)" and "that has no Alabama sourced income as a result of the dividends paid deduction." The REIT certifies on Schedule NRC-Exempt, which "should be attached to Form PTE-C each year," and "Failure to attach form NRC-Exempt to the return shall cause the pass-through entity" to remit the composite payment as originally required.

The REIT definitions differ in ways that change the answer. Maryland uses the federal definition and stops there. Utah adds a full-distribution condition. Virginia, Indiana and Alabama exclude captive REITs, each by its own wording (Indiana ties the exclusion to a captive REIT "required to add back its dividends paid"; Alabama to its statutory definition and to the absence of Alabama-source income after the deduction). A closely held REIT controlled by a corporation needs a separate answer in each of those three states.

States whose regimes never reach a corporate partner

Kentucky. KRS 141.206(4)(a), in the version effective July 15, 2026, requires withholding on the distributive share "of each nonresident individual partner, member, or shareholder." The Department of Revenue states that "Nonresident C-Corporations that are partners or members of pass-through entities are not subject to withholding," while they keep their own Kentucky filing obligation. The Department's 2021 instructions date the change to tax years beginning January 1, 2022. The REIT partner is outside the regime because it is a corporation.

Connecticut. The Department of Revenue Services describes the composite income tax as payable "on behalf of nonresident noncorporate members" and "members that are pass-through entities." Its definition of corporate member, "each member which is a C corporation for federal income tax purposes," expressly includes a "real estate investment trust, real estate mortgage investment conduit, regulated investment company." The REIT partner is a corporate member and outside the payment.

Ohio. Ohio's IT 1140 withholding runs only on qualifying investors, and R.C. section 5733.40(I)(6) excludes "An investor that is treated as a C corporation for federal income tax purposes for the entire qualifying taxable year." The exclusion turns on federal classification, so a REIT partner that is a C corporation for federal purposes all year falls within it. The library's article on Ohio pass-through withholding and investor exemptions works through the rest of that census.

States that withhold unless the REIT signs or qualifies

Georgia. Georgia's rule excuses withholding for a C corporation, individual or fiduciary member that agrees "to be subject to personal jurisdiction in this State for all income tax purposes" and makes estimated payments if required (Ga. Comp. R. & Regs. 560-7-8-.34(2)(g)1). The instrument is Form NRW-Exemption under O.C.G.A. section 48-7-129. The certification is made once: the form states that the corporate exemption covers "the current year and future years in which it is a member" and "only needs to be made one time," but also that "A copy of the completed form should be attached to the income tax return filed by the entity each year." It is due by the unextended due date of the entity's return for the first year withholding would otherwise apply, and a member that fails the conditions is withheld on as if no certification had been made (rule 560-7-8-.34(2)(g)2). Georgia has no REIT category; the REIT signs as a corporation.

South Carolina. S.C. Code section 12-8-590(C) requires a partnership to withhold 5 percent of a nonresident partner's share of South Carolina taxable income, "whether distributed or undistributed." Section 12-8-590(F)(3) excuses a nonresident partner that files an affidavit submitting to the personal jurisdiction of the Department and the state's courts, and the Department "may revoke an exemption granted by this item at any time" if the partner does not comply. Form I-309 (rev. 8/12/19) is signed by the partner and given to the partnership, which "must remit all affidavits to the SCDOR"; "The affidavit is valid for all subsequent years and should not be resubmitted to the entity." The affidavit works only if the return shows it. The 2026 SC1065 asks on line 7 for "all income exempt from withholding," including income of "Nonresident partners who provided the partnership with an I-309 affidavit," and directs the partnership to include any I-309 affidavits not previously filed. A return that omits the REIT partner's income from line 7 computes withholding on it, whatever affidavit sits in the file.

North Carolina. G.S. 105-154(d) requires the business to pay, with its return, tax on each nonresident partner's share "computed at the rate levied on individuals under G.S. 105-153.7." A partner that is not an individual escapes the payment only by an affirmation that it will pay the tax with its own return or is not subject to North Carolina income tax. The affirmation must be filed annually by the due date of the partnership's report, and a copy is attached to the report. Once the partnership has filed its return and paid, it cannot request a refund of an overpayment made for a partner; the partner claims the refund on its own return.

Massachusetts. Under 830 CMR 62B.2.2(3)(c)3, "Corporations and pass-through entities claiming to be exempt must certify to their filing of a Massachusetts return." The certificate is Form PTE-EX; the entity retains it and produces it on request. "The exemption certificate remains in effect until revoked by the member," and a member whose status changes during the year must give a new certification within 30 days of the change. A REIT partner that files a Massachusetts corporate return certifies once; one that does not file is withheld on at the applicable corporate rate.

New York. Tax Law section 658(c)(4)(A) requires estimated tax payments for partners that are nonresident individuals or C corporations, and section 658(c)(4)(D) lets the Commissioner waive the requirement for partners who are not subject to New York tax or who show they are filing returns and paying estimated tax. Form CT-2658-E is the corporate partner's certificate: it certifies that the corporation is exempt from Articles 9, 9-A and 33 or will comply with the corporate estimated tax and return requirements, the partnership keeps it, and the current version "expires on February 1, 2028," after which a new certificate is required.

Illinois. The Department's Publication 129 (R-12/25) states that "Corporations, S corporations, and partnerships are considered nonresidents" for pass-through withholding. Form IL-1000-E "is completed by any member that is not an individual," certifying that it will file all Illinois income tax returns and pay the tax due. Both the entity and the member keep a copy, and the form is not sent to the Department "unless requested to do so." It has no effect for a partnership that elects the pass-through entity tax for all members, since that election replaces withholding. The publication states no expiry.

New Jersey. New Jersey has no REIT exclusion. N.J.S.A. 54:10A-15.11(a)(1) requires the partnership to remit 9 percent of a nonresident corporate partner's share of New Jersey income, and subsection (c) excludes from that term a corporation that maintains a regular place of business in New Jersey other than a statutory office, or that is exempt from tax under section 3 of P.L.1945, c.162, the Corporation Business Tax Act's exemption section. The 2025 NJ-1065 instructions add a code for a nonresident corporate partner that is a member of a combined group unitary with the partnership. For each of these partners the partnership "must obtain and retain in its files" Form NJ-1065E, and "The form is valid for one return period." A REIT partner with no New Jersey place of business and no combined-group relationship with the partnership is a nonresident corporate partner, and the payment is due unless the partner reasonably expects a refund of it on account of the pass-through business alternative income tax credit (N.J.S.A. 54:10A-15.11(a)(3)).

Maine. 36 M.R.S. section 5250-B(2) requires withholding at the highest rate on each nonresident member's share, and a nonresident includes "a business entity that does not have its commercial domicile in the State" (section 5250-B(1)(B)). The statute's only exceptions are a share under $1,000 and income the bureau has determined, "by rule, ruling or instruction," is not subject to withholding (section 5250-B(3)). Any relief for a REIT partner lies in those administrative sources, not in the statute.

An exemption at one tier does not travel to the next

The REIT partner's exemption belongs to the operating partnership's withholding on the REIT partner. It does not stop a lower tier from withholding on the operating partnership itself, and the states say so in different ways. Utah's Publication 68 defines the relationship: "A pass-through entity is directly related to a pass-through entity taxpayer if they occupy consecutive tiers," and in Example 4 a first-tier partnership must withhold for a partnership partner even though a REIT owns that partner, because the partnership and the REIT "are not directly related." Maryland handles in-state tiers differently: the tax does not apply to the share of a member that is itself a pass-through entity formed in Maryland or registered with the Department of Assessments and Taxation, which then complies on its own (Tax-Gen. section 10-102.1(f)(1)); and its REIT exclusion speaks of the "direct or indirect" share of a REIT member, a phrase whose reach through an intermediate partnership the statute does not further define. Virginia's instructions state that "Generally, a PTE does not need to withhold for a nonresident owner that is also a PTE," and that withholding "does not pass through an intermediate PTE to owners that are more than one level of ownership away."

A REIT partner exempt at the operating partnership can therefore still bear withholding a lower tier paid on the operating partnership's share, as a lower-tier credit that reaches the REIT partner only where the state lets the credit pass through. The analysis runs tier by tier: at each lower tier for the operating partnership, and at the operating partnership for each of its three partners.

How the instruments differ

By mechanics, the states fall into four groups: nothing signed (Maryland, Utah, Kentucky, Connecticut, Ohio); a code or list on the return (Virginia, Indiana, South Carolina's line 7); a certificate kept by the partnership (Massachusetts until revoked, New York until February 1, 2028, Illinois with no stated end, New Jersey for one return period); and a certificate sent to or with the state (Georgia once and attached yearly, South Carolina once, Alabama and North Carolina every year).

Three events break an instrument that was valid when signed. A merger or name change leaves a certificate in a predecessor's name, and a careful file replaces it with one in the successor's name. A dated certificate lapses on its stated date, as New York's will. And a change in the REIT's own facts (captive status, full distribution, a New Jersey place of business, a Massachusetts filing) changes the answer in the states whose definitions turn on that fact, whatever certificate is on file. Over-withholding is the other cost: in North Carolina the partnership cannot recover a payment made for a partner once its return is filed, so the cash returns only through the partner, and the year's true-up between the partnership's payments and each partner's liability becomes a partner-level refund.

Practice notes

The working tool is a matrix with one row per state in which the operating partnership files and a column for each of the REIT partner, the management corporation and the executive partnership. For the REIT partner, each row records the source of relief (statute, rule, instructions, corporate exclusion, certificate, or none), the REIT definition the state uses and whether the REIT meets it that year, the instrument, who keeps it, where it is reported on the return, and its renewal date. The REIT's captive status and its distribution for the year are confirmed annually with its own tax function, since Utah, Virginia, Indiana and Alabama condition the relief on them. Certificates are kept in the REIT's current legal name, and the file notes New York's 2028 expiry, New Jersey's single return period, North Carolina's annual affirmation and Alabama's annual schedule. Return preparation is checked against the matrix line by line, because South Carolina and Virginia read the exemption from the return, not from the file. Each lower tier's withholding on the operating partnership is tracked as a separate item from the REIT partner's exemption. G&G State Tax Group provides nonresident withholding and partner exemption analysis for operating partnerships with REIT and corporate partners alongside its state and local tax practice.