A REIT, or Real Estate Investment Trust, is a tax designation for a corporation investing in Real Estate.
Investing in real estate is often very complex and should not be taken on alone for first time. Consider a cheap, well-managed REIT for your commercial real estate exposure.
This tax designation reduces or eliminates corporate income tax, but REIT’s are required to distribute 90% of their income to its investor. The REIT was designed to provide a stock-like option for those wishing to invest in Real Estate. They are a liquid, dividend paying option to participate in the Real Estate market. REITs can be private or publicly traded and placed on public stock exchanges. Individuals can invest in a REIT by either purchasing shares of a REIT directly or invest in a REIT mutual fund.
REITS invest in a variety of real estate properties such as office buildings, shopping malls, warehouses, apartments and hotels. By purchasing shares of a REIT an individual investor can hold an investment in commercial property that he or she would not be able to purchase by themselves. The investor also has the added advantages of holding a liquid asset in the form of shares that can be sold on the market unlike the real esate itself which is illiquid. Investing in a REIT provides the investor with dividend income and also allows them to own a real esate portfolio rather than just a single building.
Qualification for a REIT in the USA
In order to qualify for the advantages of being a pass-through entity for U.S. corporate income tax, a REIT must:
- Be structured as corporation, trust, or association
- Be managed by a board of directors or trustees
- Have transferable shares or transferable certificates of interest
- Otherwise be taxable as a domestic corporation
- Not be a financial institution or an insurance company
- Be jointly owned by 100 persons or more
- Have 95 percent of its income derived from dividends, interest, and property income
- Pay dividends of at least 90% of the REIT’s taxable income
- No more than 50% of the shares can be held by five or fewer individuals during the last half of each taxable year
- At least 75% of total investment assets must be in real estate
- Derive at least 75% of gross income from rents or mortgage interest
- No more than 20% of its assets may consist of stocks in taxable REIT subsidiaries.
REIT’s are essentially owned and operated by a board of directors which act like a corporation. The board of directors buy or develops real estate to rent out or sell in the future for an appreciated value. The rent or profit collected by its property portfolio is then distributed to its share holders. REITs generally manage billions of dollars worth of real estate and fund large commercial sized real estate projects. With REITs, individual investors or companies would not have the funds to enter the commercial real estate m