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, 2017, 2016 and 2015.

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, 2017, 2016 and 2015.

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, 2017, 2016 and 2015. As of December 31, 2017, we had deferred tax liabilities net of deferred tax assets of approximately $167.0 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 against the deferred tax assets at December 31, 2017 and 2016 relate primarily to net operating loss carryforwards attributable to certain foreign jurisdiction and the Telx Acquisition, 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, 2017 and 2016.

Deferred income tax assets and liabilities as of December 31, 2017 and 2016 were as follows (in thousands):



	2017			2016
Gross deferred income tax assets:
Net operating loss carryforwards	$	77,227		$	98,054
Basis difference - real estate property	181,254			156,394
Basis difference - intangibles	506			2,225
Other - temporary differences	47,649			31,503
Total gross deferred income tax assets	306,636			288,176
Valuation allowance	(46,302		)	(45,628		)
Total deferred income tax assets, net of valuation allowance	260,334			242,548
Gross deferred income tax liabilities:
Basis difference - real estate property	315,553			289,867
Basis difference - intangibles	65,921			64,714
Straight-line rent	1,597			5,172
Other - temporary differences	44,241			36,614
Total gross deferred income tax liabilities	427,312			396,367
Net deferred income tax liabilities	$	166,978		$	153,819

The 2017 Tax Legislation, enacted on December 22, 2017, reduced the corporate federal tax rate in the U.S. to 21%, effective upon enactment. As such, deferred tax assets and liabilities are remeasured using the lower corporate federal tax rate at December 31, 2017. While we do not expect other material impacts, the new tax rules are complex and lack developed administrative guidance. We continue to work with our tax advisors to analyze and determine the full impact that the 2017 Tax Legislation as a whole will have on us.