What Is a REIT?
A Real Estate Investment Trust, or
REIT, is a company that owns, and in most cases, operates income-producing real
estate. Some REITs finance real estate. To be a REIT, a company must distribute
at least 90% of its taxable income to shareholders annually in the form of
dividends.
A REIT is essentially a corporation or business trust that combines the capital
of many investors to acquire or provide financing for all forms of real estate.
A REIT serves much like a mutual fund for real estate in that retail investors
obtain the benefit of a diversified portfolio under professional management.
Its shares are freely traded, often on a major stock exchange.
A corporation or trust that qualifies as a REIT generally does not pay
corporate income tax to the Internal Revenue Service (IRS). This is a unique
feature and one of the most attractive aspects of a REIT. Most states honor
this federal treatment and do not require REITs to pay state income tax. This
means that nearly all of a REIT's taxable income can be distributed to
shareholders, and there is no double taxation of the income to the shareholder.
Unlike a partnership, a REIT cannot pass its tax losses onto its investors.
In order for a corporation or trust to qualify as a REIT, it must comply with
certain provisions within the Internal Revenue Code. As required by the Tax
Code, a REIT must:
- be a corporation, business trust or similar association;
- be managed by a board of directors or trustees;
- have shares that are fully transferable;
- have a minimum of 100 shareholders;
- have no more than 50 percent of the shares held by five or fewer individuals during the last half of each taxable year;
- invest at least 75 percent of the total assets in real estate assets;
- derive at least 75 percent of gross income from rents from real property, or interest on mortgages on real property;
- derive at least 95 percent of gross income from the same items that qualify for the 75 percent test or from dividends or interest from any source;
- pay dividends of at least 90 percent of REIT taxable income.
NOTE: This information was taken from www.nareit.com.
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