Real Estate Investment Trusts (REITs) have been around for a number of years. However, they have some unique risk – reward features that every investor should be aware of. Consequently, we have provided a series of posts, with this being the second, which provide information concerning these types of investments. Because of the fact that this post is being provided for informational and/or educational purposes only, it is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. If you have any questions about REITs, you should contacted a qualified professional.
How to Qualify as a REIT?
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. A company that qualifies as a REIT is allowed to deduct from its corporate taxable income all of the dividends that it pays out to its shareholders. Because of this special tax treatment, most REITs pay out at least 100 percent of their taxable income to their shareholders and, therefore, owe no corporate tax.
In addition to paying out at least 90 percent of its taxable income annually in the form of shareholder dividends, a REIT must:
- Be an entity that would be taxable as a corporation but for its REIT status;
- Be managed by a board of directors or trustees;
- Have shares that are fully transferable;
- Have a minimum of 100 shareholders after its first year as a REIT;
- Have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year;
- Invest at least 75 percent of its total assets in real estate assets and cash;
- Derive at least 75 percent of its gross income from real estate related sources, including rents from real property and interest on mortgages financing real property;
- Derive at least 95 percent of its gross income from such real estate sources and dividends or interest from any source; and
- Have no more than 25 percent of its assets consist of non-qualifying securities or stock in taxable REIT subsidiaries.