NATURE OF BUSINESS

Washington Real Estate Investment Trust (“Washington REIT”), a Maryland real estate investment trust, is a self-administered, self-managed equity real estate investment trust, successor to a trust organized in 1960. Our business consists of the ownership and operation of income-producing real estate properties in the greater Washington Metro region. We own a diversified portfolio of office buildings, multifamily buildings and retail centers.

Federal Income Taxes

We believe that we qualify as a REIT under Sections 856-860 of the Internal Revenue Code and intend to continue to qualify as such. To maintain our status as a REIT, we are, among other things, required to distribute 90% of our REIT taxable income (which is, generally, our ordinary taxable income, with certain modifications), excluding any net capital gains and any deductions for dividends paid to our shareholders on an annual basis. When selling a property, we generally have the option of (a) reinvesting the sales proceeds of property sold, in a way that allows us to defer recognition of some or all taxable gain realized on the sale, (b) distributing gains to the shareholders with no tax to us or (c) treating net long-term capital gains as having been distributed to our shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to our shareholders. During the three years ended December 31, 2015, we sold our interests in the following properties (in thousands):



Disposition Date	Property	Type	Gain on Sale
March 20, 2015	Country Club Towers	Multifamily	$	30,277
September 9, 2015	1225 First Street ⁽¹⁾	Multifamily	—
October 21, 2015	Munson Hill Towers	Multifamily	51,395
December 14, 2015	Montgomery Village Center	Retail	7,981
		Total 2015 ⁽²⁾	$	89,653

January 21, 2014	Medical Office Portfolio Transactions III & IV ⁽³⁾	Medical Office	$	105,985
May 2, 2014	5740 Columbia Road	Retail	570
		Total 2014	$	106,555

March 19, 2013	Atrium Building	Office	$	3,195
November 2013	Medical Office Portfolio Transactions I & II ⁽⁴⁾	Medical Office / Office	18,949
		Total 2013	$	22,144

⁽¹⁾ Interest in land held for future development.

⁽²⁾Excludes gain related to parcel of land at Montrose Shopping Center condemned as part of an eminent domain taking action (see note 3 under "Properties Sold").

⁽³⁾ Woodburn Medical Park I and II and Prosperity Medical Center I, II and III.

⁽⁴⁾ 2440 M Street, 15001 Shady Grove Road, 15505 Shady Grove Road, 19500 at Riverside Park (formerly Lansdowne Medical Office Building), 9707 Medical Center Drive, CentreMed I and II, 8301 Arlington Boulevard, Sterling Medical Office Building, Shady Grove Medical Village II, Alexandria Professional Center, Ashburn Farm Office Park I, Ashburn Farm Office Park II, Ashburn Farm Office Park III, Woodholme Medical Office Building, two office properties (6565 Arlington Boulevard and Woodholme Center) and undeveloped land at 4661 Kenmore Avenue.

We reinvested a portion of the Medical Office Portfolio, Country Club Towers, Munson Hill Towers and Montgomery Village Center sales proceeds in replacement properties through deferred tax exchanges. Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed taxable income and taxes on the income generated by our taxable REIT subsidiaries (“TRSs”). Our TRSs are subject to corporate federal and state income tax on their taxable income at regular statutory rates, or as calculated under the alternative minimum tax, as appropriate. As of December 31, 2015 and 2014, our TRSs had no net deferred tax assets and net deferred tax liabilities of $0.7 million and $0.6 million, respectively. These deferred tax liabilities are primarily related to temporary differences in the timing of the recognition of revenue, amortization and depreciation. During 2011, we recognized a $14.5 million impairment charge at Dulles Station, Phase II, a property held for future development included in one of our TRSs. The impairment charge created a deferred tax asset of $5.7 million at this TRS, but we have determined that it is more likely than not that this deferred tax asset will not be realized. We have therefore recorded a valuation allowance for the full amount of the deferred tax asset related to the impairment charge at Dulles Station, Phase II.

The following is a breakdown of the taxable percentage of our dividends for these years ended December 31, 2015, 2014 and 2013, (unaudited):



	2015		2014		2013
Ordinary income	78	%	40	%	62	%
Return of capital	22	%	52	%	38	%
Qualified dividends	—	%	—	%	—	%
Unrecaptured Section 1250 gain	—	%	8	%	—	%
Capital gain	—	%	—	%	—	%