Search
  • networkventuresgroup

Real Estate Tax Advantage #1 - Real Estate Investment Trusts (REIT)

Real estate investment trusts, a.k.a., a mouthful. Let’s call them “reets” like the real estate savvy people do, shall we?


What is a REIT?


In 1960, Congress established REITs as an amendment to the Cigar Excise Tax Extension. The provision allows investors to buy shares in commercial real estate portfolios. REITs are companies that owns, operates, or finances income-producing real estate (think, apartment complexes, commercial facilities, retail centers, self-storage, warehouses, etc.).


Many REITs are publicly traded on major securities exchanges, so investors may buy and sell their shares like stocks through the trading session.


How Does a REIT Work?


REITs pool together the capital of numerous investors, making it possible for individual investors to earn dividends from real estate investments without having to buy, manage, or finance any properties themselves.


To qualify as a REIT, a company must comply with certain provisions in the Internal Revenue Code. Specifically, a company must meet the following requirements to qualify as a REIT:


  1. Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries

  2. Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales

  3. Pay a minimum of 90% of taxable income in the form of shareholder dividends each year

  4. Be an entity that's taxable as a corporation

  5. Be managed by a board of directors or trustees

  6. Have at least 100 shareholders after its first year of existence

  7. Have no more than 50% of its shares held by five or fewer individuals


Benefits of a REIT


1. Favorable Tax Treatment. If the company meets every requirement of a REIT, it enjoys special tax status. A qualified REIT is not required to pay any taxes at the company level, in contrast to the double-taxation issues of corporate stocks where the corporation is required to pay taxes on its income before distributing dividends to shareholders, and then the shareholders are required to pay taxes on the dividends they receive.


2. Portfolio Diversification.


3. Access to Big-Ticket Deals. An investor can buy into a REIT for $5,000 and take part in a $5 million commercial real estate deal it otherwise would not have had to capital to take part in.


4. Steady Cash Flow.


Risks of a REIT


1. Interest Rate Sensitivity. REIT share prices are sensitive to changes in interest rates. When interest rates increase, REIT prices decrease. When interest rates decrease, REIT share prices increase.


2. Bankruptcy. A REIT that holds primarily retail properties could be affected negatively by retail bankruptcies and mall closures.


How to Invest in a REIT:

Most REITs are purchased and sold over national exchanges in the same way regular corporate stocks are. Like stocks, an investor can find data on any publicly traded REIT. Pay attention to the REIT’s listing price, current yields, growth trends, management experience, and underlying asset values.



1 view0 comments

Recent Posts

See All

The IRS lumps income into three categories: portfolio; active; and passive. Portfolio Income. The portfolio class includes income from regular investments, like stocks, bonds, and mutual funds. Active

This article is about purchasing an investment property “subject-to” an existing mortgage to leverage existing financing, thereby eliminating the need to apply for a new loan. Sounds great, right? In