Income Taxes

Digital Realty Trust, Inc. has elected to be treated, and believes that it has been organized and has operated in a manner that has enabled it to qualify as a REIT for federal income tax purposes. As a REIT, Digital Realty Trust, Inc. is generally not subject to corporate level federal income taxes on earnings distributed currently to its stockholders. Since inception, Digital Realty Trust, Inc. has distributed at least 100% of its taxable income annually. As such, no provision for federal income taxes has been included in the accompanying consolidated financial statements for the years ended December 31, 2016, 2015 and 2014.

The Operating Partnership is a partnership and is not required to pay federal income tax. Instead, taxable income is allocated to its partners, who include such amounts on their federal income tax returns. As such, no provision for federal income taxes has been included in the Operating Partnership’s accompanying consolidated financial statements.

We have elected taxable REIT subsidiary (“TRS”) status for some of our consolidated subsidiaries. In general, a TRS may provide services that would otherwise be considered impermissible for REITs to provide and may hold assets that REITs cannot hold directly. Income taxes for TRS entities were accrued, as necessary, for the years ended December 31, 2016, 2015 and 2014.

For our TRS entities and foreign subsidiaries that are subject to U.S. federal, state and foreign income taxes, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe it is more likely than not that the deferred tax asset may not be realized, based on available evidence at the time the determination is made. An increase or decrease in the valuation allowance that results from a change in circumstances that causes a change in our judgment about the realizability of the related deferred tax asset is included in income. Deferred tax assets (net of valuation allowance) and liabilities were accrued, as necessary, for the years ended December 31, 2016, 2015 and 2014. As of December 31, 2016, we had deferred tax liabilities net of deferred tax assets of approximately $153.8 million primarily related to our foreign properties, classified in accounts payable and other accrued expenses in the consolidated balance sheet. The majority of our net deferred tax liability relates to differences between the tax basis and book basis of the assets acquired in the Sentrum Portfolio acquisition in 2012 and the European Portfolio Acquisition in July 2016. The valuation allowance at December 31, 2016 and 2015 relate primarily to certain foreign jurisdiction and net operating loss carryforwards from the Telx Acquisition that we do not expect to utilize, and deferred tax assets resulting from certain foreign real estate acquisition costs, which are not depreciated for tax purposes, but are deductible upon ultimate sale of the property. Given the indefinite holding period associated with these assets, realization of these deferred tax assets is not more-likely-than-not as of December 31, 2016 and 2015.

Deferred income tax assets and liabilities as of December 31, 2016 and 2015 were as follows (in thousands):



	2016			2015
Gross deferred income tax assets:
Net operating loss carryforwards	$	98,054		$	123,091
Basis difference - real estate property	156,394			103,789
Basis difference - intangibles	2,225			2,002
Other - temporary differences	31,503			9,406
Total gross deferred income tax assets	288,176			238,288
Valuation allowance	(45,628		)	(35,266		)
Total deferred income tax assets, net of valuation allowance	242,548			203,022
Gross deferred income tax liabilities:
Basis difference - real estate property	289,867			273,155
Basis difference - intangibles	64,714			14,374
Straight-line rent	5,172			14,269
Other - temporary differences	36,614			32,420
Total gross deferred income tax liabilities	396,367			334,218
Net deferred income tax liabilities	$	153,819		$	131,196