The following is a high-level overview of the basic tax laws that apply to REITs. An entity must meet a variety of organizational, operational, distribution, and compliance standards to qualify as a REIT.
1. What are the requirements for a real estate company to qualify as a REIT?
2. How do real estate investment trusts (REITs) work?
3. What are the requirements for a REIT’s dividend distribution?
4. What are the requirements to become a REIT?
5. Law firms that specialize in real estate investment trusts (REITs)
6. Accounting Firms with Real Estate Investment Trust (REIT) Experience
7. Firms that specialize in real estate investment trusts (REITs) as examples of investment banking firms
8. Various
A U.S. REIT must be founded as a corporation in one of the 50 states or the District of Columbia for federal tax reasons. It must be governed by directors or trustees, with transferable shares. A REIT must meet two ownership standards beginning with its second taxable year: it must have at least 100 shareholders (the 100 Shareholder Test), and five or fewer individuals cannot own more than 50% of the REIT’s stock during the last half of the taxable year (the 5/50 Test).
Most REITs include percentage ownership limitations in their organizational documents to ensure compliance with these criteria. Because of the requirement of 100 shareholders and the intricacy of each of these criteria, tax and securities law guidance should be sought before incorporating a REIT.
Can anyone set up a REIT?
Who is eligible to apply? A company or the principal company of a group can apply to be a REIT if it: has an existing property rental business with at least three properties, none of which represents more than 40% of the total value of the properties involved; and has an existing property rental business with at least three properties, none of which represents more than 40% of the total value of the properties involved. For tax reasons, he or she is a UK resident.
How do you start a REIT in scratch?
Before being classified as a REIT, the Internal Revenue Service (IRS) requires you to meet certain thresholds, and there are specific requirements you must continue to meet. The procedures outlined below are a standard technique used by investors to form a private REIT.
Decide what type of REIT you want to form
Unless you have a real estate portfolio worth more than $100 million, you’ll probably start off as a private REIT. After that, you’ll have to pick whether to create an equity REIT or a mortgage REIT.
There are multiple niches in equity REITs that incorporate various property kinds. These frequently pique the interest of investors because they know exactly what they’re getting into. The following are the several sorts of REITs you might create:
Once you’ve decided what you want to achieve, the steps below will take you from concept to REIT status.
Form a taxable entity
You must first form a corporation with any partners that would subsequently become the REIT. Because certain standards must still be satisfied, this is frequently done through a management firm. This is the optimum moment to draft a detailed operating agreement with any potential partners. This will affect how the company is run in the future.
Draft a Private Placement Memorandum (PPM)
This is an area where you should get legal advice. The PPM will give you a lot of information about the company. The following are a few of them:
The private placement memorandum is the document you’ll hand out to potential investors. Investors will be more comfortable with your company if you have a clear purpose and detailed information.
Find investors
To be classed as a REIT, your organization must have at least 100 investors. The IRS only requires you to fulfill that barrier by the beginning of the REIT’s second tax year, so you don’t have to collect all 100 right now. Losing your REIT status due to a lack of investors, on the other hand, would be detrimental to investor relations. Before moving forward, most REIT firms will need at least 100 investor commitments.
It’s vital to remember that a REIT can’t have more than five investors owning more than 50% of the shares, or it’ll be taxed as a personal holding corporation.
Convert your management company into a REIT
You’ll need to modify your company’s structure from a management company to a REIT and amend your certificate of incorporation whenever you’re ready to move forward with your REIT launch.
When it comes to filing taxes, converting the company into a REIT will need filing IRS Form 1120-REIT. This is the form that will ask for information to verify that you meet the requirements to be taxed as a REIT, and it is the form that you will use to file your taxes.
Maintain compliance
Creating a REIT isn’t a one-and-done proposition. To maintain the same tax treatment, you must continue to qualify.
- Quarterly, at least 75% of the REIT’s assets must be in real estate or real estate mortgages.
- Rental income or mortgage interest must account for at least 75% of the REIT’s total income.
- Nonqualifying sources of revenue, such as service fees or other types of business income, can account for up to 5% of the REIT’s total income.
Naturally, this isn’t an exhaustive list. The IRS has a comprehensive list of conditions for being taxed as a REIT.
How do I register a REIT?
To register a REIT with the Board, the sponsor must submit a Form A application on behalf of the Trust to the Board. Parties who want to REIT
What is the minimum investment for a REIT?
Purchasing shares in unlisted public REITs is more difficult. It may be more difficult to identify public non-traded REITs on your online brokerage’s trading platform because they aren’t traded on an exchange. Instead, you might have to buy them directly from the REIT business or through a third-party broker-dealer. Although anyone can invest, public non-traded REITs typically have a $1,000 to $2,500 minimum investment requirement.
Crowdfunding real estate investing platforms such as DiversyFund, Fundrise, and Realty Mogul provide another option for investing in publicly traded unlisted REITs. However, these platforms typically demand investors to make longer-term commitments to real estate assets. In many circumstances, this can take up to five years or more.
How do REITs make money?
REITs, like any other business, require capital. An IPO (initial public offering) is how a publicly traded REIT (real estate investment trust) accomplishes this. This is similar to selling any other stock to the general public, who are investing in the company’s income-producing real estate. People who purchase initial public offerings (IPOs) are investing in real estate that is managed similarly to a stock portfolio. These outside cash sources allow the REIT to acquire, develop, and manage real estate in order to generate profits. REITs generate income, and shareholders must get 90 percent of that taxable income on a regular basis. REITs create money by renting, leasing, or selling the assets they purchase. The shareholders elect a board of directors, which is in charge of selecting investments and recruiting a team to oversee them on a daily basis.
FFO stands for funds from operations, which is how most REIT earnings are calculated. FFO is defined by the National Association of Real Estate Investment Trusts (NAREIT) as the net income from rent and/or sales of properties after deducting administrative and financing costs. The NAREIT’s net income computations follow GAAP (generally recognized accounting rules). The issue is that depreciation of assets is presumed to be a predictable given in GAAP calculations, which skews the true measure of a REIT’s revenue in a negative direction because real estate, which is what REITs deal in, retains or even improves in value over time. As a result, depreciation is not included in FFO’s net income.
How much money does it take to start a REIT?
Private REITs are not listed on a national stock exchange or registered with the Securities and Exchange Commission. As a result, private REITs are exempt from the same disclosure obligations as publicly traded or non-traded REITs.
Private REITs offer shares that are neither traded on national exchanges nor registered with the Securities and Exchange Commission (SEC), but are instead issued under one or more of the SEC’s securities exemptions. Regulation D, which allows an issuer to sell securities to “accredited investors,” and Rule 144A, which exempts securities issued to qualified institutional buyers, are examples of these exemptions (QIBs).
Private REITs, also known as private placement REITs, are securities that are exempt from registration with the Securities and Exchange Commission under Regulation D of the Securities Act of 1933 and whose shares are not traded on a national securities exchange. Institutional investors, such as large pension funds, and/or private REITs are the only buyers of private REITs “Individuals with a net worth of at least $1 million (excluding their primary residence) or income exceeding $200,000 in the previous two years ($300,000 with a spouse) are considered accredited investors.
Shares aren’t traded on a stock market and aren’t particularly liquid. Companies’ share redemption plans differ, and they may be limited, non-existent, or subject to change.
Formation fees, annual management fees, and a percentage of earnings in the form of a commission vary per company, but may include formation fees, annual management fees, and a percentage of profits in the form of a commission “interest was piqued.”
Private REITs created for institutional or accredited investors typically require a substantially greater minimum commitment, ranging from $1,000 to $25,000 on average.
Unless administered by a registered investment advisor under the Investment Advisers Act of 1940, they are generally exempt from regulatory regulations and scrutiny.
Aside from the Internal Revenue Code’s requirement that a REIT have a board of directors or trustees, nothing more is required.
Regulation D exempts the company from SEC registration and related disclosure obligations.
There is no public or independent source of performance statistics for private REITs.
Why are REITs a bad investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
Do all REITs pay dividends?
A REIT is a security that invests directly in real estate and/or mortgages, comparable to a mutual fund. Mortgage REITs engage in portfolios of mortgages or mortgage-backed securities, whereas equity REITs invest mostly in commercial assets such as shopping malls, hotel hotels, and office buildings (MBSs). A hybrid REIT is a fund that invests in both. REIT shares are easy to buy and sell because they are traded on the open market.
All REITs have one thing in common: they pay dividends made up of rental income and capital gains. REITs must pay out at least 90% of their net earnings as dividends to shareholders in order to qualify as securities. REITs are given special tax treatment as a result of this; unlike a traditional business, they do not pay corporate taxes on the earnings they distribute. Regardless of whether the share price rises or falls, REITs must maintain a 90 percent payment.
Are REIT a good investment?
As a result, in addition to cheap entry levels, REITs offer investors a safe and diversified portfolio with low risk and expert management, providing good returns on investment. REITs will be distinguished not only by their investment in real estate assets, but also by their restricted responsibility for all unitholders.
That’s not all, though. According to the criteria, finished projects must account for 80% of assets, while under-construction projects, equity shares, money market instruments, cash equivalents, and real estate activities account for 20%.
REITs allow investors to put their money into a diverse portfolio of commercial real estate assets. Investors who choose the direct investment path for commercial office spaces invest in a single office building.
Will REITs be able to provide the same returns on investment as’actual’ real estate investments? This is a question that small investors will be asking. No, that is not the case. Certainly, investors expecting for unreasonable profits (>20-30 percent) should go elsewhere. It’s critical to have realistic expectations for REIT returns. After adjusting for the fund management cost, a realistic ROI estimate would be in the range of 7-8 percent each year.
The return on investment (ROI) from REITs will be highly structured, realistic, and risk-averse. Investors who desire a regular income with no risk might consider REITs. Furthermore, REITs can provide investors with two types of income: capital gains from the selling of REIT units and dividend income. REITs will also be a good investment option for investors who want to diversify their portfolio beyond gold and the stock market.
REITs have already been introduced in India, and investors have seen excellent returns. The successful REIT listings in India have piqued investor interest in this new investment vehicle, and we expect more REIT listings to follow soon.
How are 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.
How much can you make from a REIT?
To put things in perspective, the S&P 500’s average dividend yield is 1.9 percent. In comparison, the average equity REIT (which owns real estate) pays around 5%. The average mortgage REIT (which owns mortgage-backed securities and related assets) pays a yield of roughly 10.6%.
