The Schedule K-1 is a standard IRS form used to report activity related to partnership interests and is issued once a year. For investments in which you have a membership interest, the K-1 will disclose your share of any taxable items for the calendar year.
If you participate in a CrowdStreet Marketplace sale, you will typically own a membership stake in a real estate LLC (limited liability company) that is taxed as a partnership. As a result, the partnership’s taxable activity is allocated to all individual members (partners) based on ownership percentage and disclosed to investors via the K-1. The sponsor of the deal in which you have invested will issue you with a K-1.
Investors in a partnership-taxed LLC will receive a Schedule K-1, whereas REITs (real estate investment trusts) will issue a 1099 to disclose their taxable interest and/or dividends.
How many K-1s will I receive?
Any investor that invests in a Marketplace sale will obtain a single federal Schedule K-1. Investors who have made multiple investments on the Marketplace will get a federal Schedule K-1 for each investment.
Unless the real estate investment is held in a state that does not impose state income tax, you should also expect to receive a state K-1 for the state in which the property is located (also see the article “Do I need to file out-of-state tax returns and why?”).
Furthermore, if you transferred your investment from one entity to another throughout the year, you should expect to get a K-1 from each corporation that held the investment at any time during the year (i.e. two in total).
Will I still receive a K-1 even if I haven’t received a distribution yet and there is no income to report from the underlying real estate investment?
Sponsors should typically provide you with a Schedule K-1, which displays your allocable share of any real estate partnership revenue and/or loss items. If the real estate partnership’s property does not generate gross revenue or incur any amount that would be recognized as a deduction or credit for federal tax purposes, sponsors may refuse to issue a K-1. The majority of investments that fit this description are properties that are still in the planning stages. Because the building has not yet been put into service, no taxable revenue or deductible expenses have been produced during the development period.
- https://www.irs.gov/faqs/small-business-self-employed-other-business/entities/entities-4
Do REITs send 1099?
Each year, if you own REIT shares, you should receive a copy of IRS Form 1099-DIV. This shows how much money you got in dividends and what kind of dividends you got:
The 1099-DIV instructions explain how to report each type of payment on your tax return.
Can REITs issue preferred stock?
The current preferred stocks of Real Estate Investment Trusts are listed below (REITs). Public Storage and PS Business Parks, two REITs that finance their companies exclusively via preferred and common stock issuance and avoid debt, are two of the largest issuers of preferred stock. As you can see in the table below, both companies have a large number of outstanding preferred stock issuance.
REIT preferred stocks do not offer qualified dividends. Dividends are always accumulated.
All REIT preferred equities are arranged in the chart below.
To sort by alphabetical or current yield, use the tab at the top of the chart.
Do REITs distribute dividends?
While most REITs pay quarterly dividends, certain REITs pay monthly dividends. This can be beneficial to investors, whether the money is used to increase income or to reinvest, because more frequent payments compound more quickly.
Are REITs S corps?
Mortgage REITs aren’t common in the hard money lending market. Nothing prevents a private money mortgage fund from acting as a REIT. It’s just not done very often. This is mostly due to the fact that the principal benefit of a REIT, the absence of entity-level taxation, can be attained by creating a fund as a limited partnership (“LP”) or a limited liability company (“LLC”). REITs have always had one or two potential advantages over LPs and LLCs, but funds that potentially profit from these advantages have rarely, if ever, been compelled to comply with the additional rules and limits required to qualify as a REIT.
Even in the private lending market, the handling of REIT income under the recently adopted Tax Cuts and Jobs Act (“TCJA”) is generating renewed interest in REITS. This is because, while the TCJA promised a 20% tax deduction for income earned from all pass-through entities, private mortgage fund managers are discovering that REIT investors are in a much better position to take advantage of these deductions than investors in funds organized as limited partnerships or limited liability companies. As a result, some investors are wondering if their fund(s) can and should be REITs. Of course, the answer will differ from fund to fund, but if the question is asked, a basic understanding of REITs and their requirements is a good place to start the discussion.
What is a REIT?
The first and most apparent question is: what precisely is a REIT? A true REIT is an entity that meets very specific qualifications and elects to be taxed as a REIT under the Internal Revenue Code (). The term is often used broadly or as a shorthand to refer to any type of real estate investment entity; however, a true REIT is an entity that meets very specific qualifications and elects to be taxed as a REIT under the Internal Revenue Code () “IRC (“Internet Relay Chat”).
The abbreviation R.E.I.T. stands for “A REIT, or real estate investment trust, does not have to be structured as a trust. In truth, many REITs are organized as corporations, but nothing prevents a REIT from being organized as a partnership or a limited liability company. REITs are also not obligated to confine their investments to real estate ownership interests. They have to be their own “real estate-related assets,” but this term encompasses more than just direct real estate ownership interests. Most importantly for private lenders, loans secured by real estate have always been included in this definition, as have REITs that invest in real estate secured loans (i.e., REITs that invest in REITs that invest in REITs that invest in REITs that invest in REITs that invest in REITs that invest in REITs that invest in “In the financial markets, mortgage REITs (“mortgage REITs”) are both permitted and widely used.
A REIT is classified as a C-corporation for tax purposes, regardless of the kind of legal entity used, and pays tax on income made at the entity level. Nonetheless, because a REIT is allowed to deduct the amount of any dividends it pays to its shareholders when calculating its taxable income, it is considered a sort of “pass-through organization” like partnerships, LLCs, and S-corporations (referred to above as “Non-REIT Pass-Through Entities”). It can virtually remove the business level tax payable on income made and given to its shareholders as dividends by doing so (via tax deductions).
REITS, on the other hand, differ significantly from Non-REIT Pass-Through Entities. REIT deductions simulate a pass-through effect by eliminating (or considerably decreasing) the REIT’s entity level tax liability, but they do not pass-through the character of that income. Rather, regardless of the nature of income received at the REIT level, income distributed by a REIT is corporate dividend income. 1 Several of the possible benefits of operating as a REIT are based on the capacity to deliver dividend income to investors regardless of the type of income received by the REIT, as detailed below.
Potential REIT Benefits
The “pass-through” taxation effect noted above is the primary benefit of establishing a REIT. REIT status allows real estate or loan funds that must (or have compelling reasons to) operate as corporations rather than Non-REIT Pass-Through Entities to do so without incurring double taxes. To enable the sale of their shares on national stock markets, public firms often prefer to be constituted as C-corporations rather than Non-REIT Pass-Through Entities. Real estate investment trusts (REITs) allow public real estate enterprises to operate as C-corporations while avoiding considerable entity-level taxation.
The key reason a private mortgage fund may consider operating as a REIT prior to the TCJA was the impact of leverage on tax-exempt investors. Many private mortgage fund managers are aware that using leverage can result in “unrelated business taxable income,” or “UBTI,” which is taxable to otherwise tax-exempt investors like pension and profit-sharing plans, as well as IRAs. Unlike real pass-through income, REIT dividends are not recognized as UBTI regardless of whether or not leverage is used at the corporate level. As a result, funds looking to use leverage or generate a considerable amount of UBTI benefit from REIT classification if a significant portion of their capital comes from tax-exempt investors.
Foreign investors benefit from the capacity to receive REIT dividends, and REITs are an excellent alternative for funds that raise a large portion of their capital from outside the United States. Many private money mortgage funds have not previously considered facilitating foreign investment, but this is changing as the industry and individual funds grow and seek and receive capital from a greater range of sources.
As previously stated, the TCJA provides an extra benefit to REITs. The TCJA revised IRC Section 199A to offer a 20% income tax deduction for “qualifying business income” or “QBI” received from pass-through organizations, including both REITs and Non-REIT Pass-Through Entities. It was signed into law by President Trump in December 2017. Unfortunately, Section 199A, as amended, limits the amount of QBI a Non-REIT Pass-Through Entity can distribute to its owners based on the amount of W-2 wages earned and the value of the entity’s “qualified property.” Applying these restrictions and estimating the amount of QBI generated by a company is difficult, and the results will differ from fund to fund. However, for the vast majority of private mortgage funds, only a small portion of their income will qualify as QBI, and each investor’s 20% deduction on their share of that QBI will be minimal.
The above-mentioned W-2 wage and qualified property requirements do not apply to REIT distributions. Rather, Section 199A regards REIT income as a distinct sort of income that is deemed QBI regardless of the REIT’s W-2 salaries or asset holdings. While 100% of a REIT’s income is deemed QBI under Section 199A, investors’ ability to take a full 20% deduction on that income may be limited by restrictions and “phase-out” provisions that apply to individual taxpayers. Nonetheless, the option to classify all of a REIT’s income as QBI, as well as the possibility of granting investors a full share of the 20% deduction, appears to be a significant new benefit that can be acquired by operating as a REIT. However, whether or not a private fund should choose to become a REIT is largely determined by the fund’s capacity to meet the REIT’s standards and limits.
REIT Requirements & Restrictions
An investment entity must meet certain requirements established in the IRC with respect to its income, assets, distributions, and structure in order to qualify as a REIT. The following is a quick rundown of these needs and limitations.
REITs must meet two income requirements: (1) “real estate related” revenue must account for at least 75% of yearly gross income, and (2) “passive” income must account for 95% of annual gross income. Sources of income that are deemed acceptable “Real estate related interest” (including interest on obligations secured by real property), rents from real property, real property gains, dividends and gains from other REITs, income from foreclosure properties, and income from temporary (non-real estate) investments are all examples of “real estate related” and “passive” for these purposes.
The following asset tests apply to REITs: (1) a REIT’s total assets must be worth at least 75 percent of its total value; (2) a REIT’s total assets must be worth at least 75 percent of its total value; (3) a REIT’s total assets must be worth at least 75 percent of its total “sed of “real estate assets” (including real estate secured loans), cash, and government securities; (2) securities other than government securities can account for no more than 25% of a REIT’s total assets; (3) securities of a single issuer can account for no more than 5% of a REIT’s total assets, except for investments in other REITs and certain REIT subsidiaries; and (4) a REIT can own no more than 10% of the total sed of “real estate assets” (including real estate secured
A REIT is required to distribute at least 90% of its taxable income to its shareholders each year. The taxable income of a REIT is calculated in the same way as the income of a regular C-corporation for this purpose, but without the advantage of the REIT’s dividend deduction. If a REIT distributes less than 100% of its REIT taxable income (including the 10% the REIT is entitled to keep), the undistributed portion must be taxed at standard corporate tax rates. The amount given must not be preferential unless the REIT is publicly offered (meaning, every stockholder of the class of stock to which a distribution is made must be treated the same as every other stockholder of that class, and no class of stock can be treated other than according to its dividend rights as a class).
A REIT must have 100 or more shareholders, and no more than 50% of the value of the REIT’s outstanding stock can be owned by five or fewer people. However, neither of these shareholder criteria applies until after the first taxable year in which a REIT election is taken, allowing the shares to be purchased by the required number of owners.
A REIT is also subject to the following corporate restrictions: (1) REIT shares must be transferable; however, securities law restrictions, restrictions on transferability of stock issued to employees, and restrictions imposed by stockholder level agreements should not result in a violation of this requirement; (2) a REIT must be managed by trustees or directors and structured accordingly; and (3) a REIT must be taxable as a US corporation (i.e., foreign corporations cannot be REITs).
To REIT or not to REIT
Looking at the REIT requirements above, it’s likely that some of them aren’t a problem for private fund managers, while others are “non-starters.” The income and asset tests should not be a problem for typical mortgage funds that invest purely in mortgage loans, and are likely currently being met. However, for many funds, distributing 90% of a fund’s income is just not a possibility.
These constraints may also raise some concerns about the net benefits of a REIT election. Will the corporation tax on undisbursed REIT income, for example, undermine the benefits of the TCJA’s 20 percent deduction for investors? Will the costs of reorganization to meet REIT standards be justified?
However, it should be evident that the structural and business concerns that must be evaluated in conjunction with the decision to operate as a REIT are substantial. Finally, the decision of whether to REIT or not to REIT must be decided only after the genuine net benefits of gaining REIT status have been assessed and weighed against the time, expenses, and effort required.
Endnotes
1 This is a simplified explanation, and REITs can use many strategies to “pass-through” capital gain income to their investors; however, a discussion of these methods is outside the scope of this article.
Why do REITs not pay taxes?
A REIT is required by law to deliver at least 90% of its taxable revenue in the form of dividends to its owners each year. This allows REITs to transfer their tax burden on to their shareholders rather than paying federal taxes.
How is income from REITs taxed?
Dividend payments are assigned to ordinary income, capital gains, and return of capital for tax reasons for REITs, each of which may be taxed at a different rate. Early in the year, all public firms, including REITs, must furnish shareholders with information indicating how the prior year’s dividends should be allocated for tax purposes. The Industry Data section contains a historical record of the allocation of REIT distributions between regular income, return of capital, and capital gains.
The majority of REIT dividends are taxed as ordinary income up to a maximum rate of 37% (returning to 39.6% in 2026), plus a 3.8 percent surtax on investment income. Through December 31, 2025, taxpayers can deduct 20% of their combined qualifying business income, which includes Qualified REIT Dividends. When the 20% deduction is taken into account, the highest effective tax rate on Qualified REIT Dividends is normally 29.6%.
REIT dividends, on the other hand, will be taxed at a lower rate in the following situations:
- When a REIT makes a capital gains distribution (tax rate of up to 20% plus a 3.8 percent surtax) or a return of capital dividend (tax rate of up to 20% plus a 3.8 percent surtax);
- When a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from
- When allowed, a REIT pays corporation taxes and keeps the profits (20 percent maximum tax rate, plus the 3.8 percent surtax).
Furthermore, the maximum capital gains rate of 20% (plus the 3.8 percent surtax) applies to the sale of REIT stock in general.
The withholding tax rate on REIT ordinary dividends paid to non-US investors is depicted in this graph.
Why do REITs issue preferred stock?
REIT preferred stock is a sort of hybrid investment that combines the features of both an equity and a bond. Preferred stocks have a senior claim to earnings and dividends compared to common stock, but are often junior to corporate bonds in the capital structure of REIT firms. REIT preferred stock pays significantly greater dividends than REIT ordinary stock, and shares are usually issued at par value (typically $25). While preferred REIT shareholders do not have voting rights, they can benefit from buying when issues are trading at a discount to par value. After five years from the date of issuance, REIT preferred stock is normally callable, and management maintains the right to redeem the shares at par. This non-call period of five years offers the possibility of both income and capital appreciation. The five-year non-call period may also provide investors with a more predictable return over time, which may be an added benefit.
So, given the option of issuing common stock or standard corporate debt, why should REITs offer preferred shares at all? First, rating agencies frequently give REITs preferential consideration when they issue preferred shares rather than traditional corporate debt. This enables businesses to show off reduced levels of leverage to potential investors and analysts. Second, REIT preferred stock offers businesses a one-of-a-kind source of capital. While these shares are typically callable at par after five years, the firm reserves the right to keep them outstanding indefinitely. Preferred stock is offered by a wide range of REITs, including those focused on residential, office, retail, industrial, self-storage, data centers, infrastructure, healthcare, and lodging. While the number of issuers and total capitalization of US REIT preferred stock is relatively limited, the rewards to investors have historically been highly significant.
REIT preferred stock has outperformed REIT common stock with nearly half the volatility over the last ten years, from the global financial crisis in October 2008 to the present. This component of the capital structure has generated excess returns due to the higher level of income generated by preferred shares and the potential for capital appreciation for discounted instruments.
What is a preferred REIT?
The MSCI REIT Preferred Index is a total return index of certain exchange-traded perpetual preferred instruments issued by US Equity and US Hybrid REITs, weighted by market capitalization.
Can a corporation own a REIT?
To ensure that the majority of a REIT’s income and assets come from real estate sources, it must pass two yearly income tests and a number of quarterly asset tests.
Real estate-related income, such as rentals from real property and interest on obligations secured by mortgages on real property, must account for at least 75% of the REIT’s annual gross income. An additional 20% of the REIT’s gross revenue must come from the above-mentioned sources or from non-real estate sources such as dividends and interest (like bank deposit interest). Non-qualifying sources of revenue, such as service fees or a non-real estate business, cannot account for more than 5% of a REIT’s income.
At least 75 percent of a REIT’s assets must be real estate assets, such as real property or loans secured by real property, on a quarterly basis. A REIT cannot own more than 10% of the voting securities of any corporation other than another REIT, a taxable REIT subsidiary (TRS), or a qualified REIT subsidiary, directly or indirectly (QRS). A REIT cannot own stock in a corporation (other than a REIT, TRS, or QRS) in which the stock’s worth exceeds 5% of the REIT’s assets. Finally, the stock of all of a REIT’s TRSs cannot account for more than 20% of the value of the REIT’s assets.
Can you get rich off REITs?
There is no such thing as a guaranteed get-rich-quick strategy when it comes to real estate equities (or pretty much any other sort of investment). Sure, some real estate investment trusts (REITs) could double in value by 2021, but they could also swing in the opposite direction.
However, there is a proven way to earn rich slowly by investing in REITs. Purchase REITs that are meant to grow and compound your money over time, then sit back and let them handle the heavy lifting. Realty Income (NYSE: O), Digital Realty Trust (NYSE: DLR), and Vanguard Real Estate ETF are three REIT stocks in particular that are about the closest things you’ll find to guaranteed ways to make rich over time (NYSEMKT: VNQ).
Will REITs Recover in 2021?
In 2021, commercial real estate and REITs are expected to begin to recover, with the speed of recovery being determined by the availability and efficacy of a vaccine.
