What is a Real Estate Investment Trust?

A Real Estate Investment Trust or REIT is a very specific type of legal entity. A REIT is a company whose primary business is owning, developing, and managing real estate properties. It must be developing properties primarily to hold them in its own investment portfolio. REITs can be either publicly traded or privately traded. Many large REITs trade on the stock exchanges, both domestically and internationally, but there are smaller, private ones with just a few properties in them.

REITs can contain equity investments, i.e. properties, or debt investments such as mortgages or notes. There are also hybrid REITs that invest in both. The REIT legal structure passes at least 90% of its net income on to investors each year. In exchange for this, it is not required to pay taxes at the REIT level. It must have at least 100 investors after its first year and no more than 50% of its shares can be held by 5 or fewer individuals.

REIT dividends are taxed at ordinary income tax rates, so they are not particularly tax-efficient entities. However, their dividends do qualify for the 199A deduction, which helps somewhat. They also can often label a significant chunk of their distributions as “return of capital”, which reduces the tax bite. They cannot pass thru losses or depreciation directly to investors, but in some ways the return of capital portion of the distribution serves a similar function. REIT dividends are paid using a 1099, not a K-1. So you will never have to file in multiple states due to owning a REIT. Thus a traditional fund has some tax advantages over a REIT, and a REIT has some tax advantages over a traditional fund. If you want to maximize the depreciation passed through, the fund structure is better. If you want to minimize your tax prep costs and hassles, the REIT structure is better.

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00:00 What is a REIT?
00:50 REIT Dividends
01:01 Return Of Capital
01:16 You Get A 1099, Not A K-1