Real estate investment trusts are an investment vehicle that owns, operates or finances income producing real estate. A real estate investment trust, or REIT, can be a corporation, trust, or association that is managed by trustee(s) or director(s) to provide its investors a share of income produced through a real estate investment. While REITs are able to avoid the double taxation issue, they are required to distribute their taxable income as dividends to their shareholders in order to retain the status of a REIT.

Benefits of REITs

REITs provide their investors some favorable investment features. Collectively, REITs of all types own more than $3 trillion in gross assets in the United States. Public REIT funds that were raised in 2019 hit $107.3 billion, nearly twice of that in 2018 and 7% higher than the last peak in 2017. Therefore, it shows how REITs are able to raise ample amounts of capital in real estate investments. Additionally, REITs provide investors high dividends that increase accordingly with inflation rates. REITs offer its investors a reduction in the overall risk level according to a study by Ibbotson Associates, where they showed a correlation between REIT stock returns and other common stocks. It showed that REITs display a less volatile investment and may be a way to diversify an investor’s portfolio.

REIT Requirements

In order to meet the qualifications for REIT status, the entity must meet several requirements. The entity must: 

  1. Be managed by one or more trustees or directors.
  2. Be a corporation, trust or association taxed as a domestic corporation.
  3. Be at least 100 shareholders and its shares must be freely transferable.
  4. Have no more than 50% of the stock owned directly or indirectly by five or fewer individuals during the last half of the taxable year. 

As stated in §856, a REIT must also meet a 75% gross income and a 95% gross income test. In regards to the taxation of REITs, the dividends are taxable to the shareholder; however, if a REIT pays out more than its taxable income, the excess is a nontaxable return of capital that reduces the shareholder’s basis. In order to take advantage of a REIT, certain steps can be taken to minimize the REIT’s tax impact. As all items with tax implications, it is recommended to speak with an informed tax professional in order to fully understand the complexities of a REIT and minimize its tax impact.

If you have any questions about REITs, and their tax implications for you, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.