What is a REIT? Real Estate Investment Trusts and Taxation

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

REITs, or real estate investment trusts, are often described as a mutual fund for real estate.  Congress established REITs to allow individual investors to invest in large-scale, income-producing real estate. Since their introduction in 1960, REITS have grown in popularity and are commonplace in real estate property ventures, including multi-family residential, industrial, retail, office, self-storage, single-family housing and others.

REITs are subject to a several initial qualification rules as well as ongoing rules to maintain REIT status.  REITs may be publicly traded or private, and generally fall into three categories: equity REITs, mortgage REITs, and hybrid REITs.

What is a REIT? 

A REIT is a corporation, trust or association that owns (and typically manages and operates) income-producing real estate or real estate-related assets.  REITs pool the capital of numerous investors to purchase a portfolio of properties.

More technically, a REIT is a qualifying entity that satisfies several federal tax requirements and elects to be taxed as a REIT. To qualify as a REIT, an organization must:

In addition, a REIT must also satisfy the following requirements:

Benefits of REIT Status

A company that qualifies as a REIT is allowed to deduct the dividends that it pays out to its shareholders. Because of this special tax treatment, most REITs pay out 100 percent of their taxable income to their shareholders and, therefore, owe no corporate tax.  Because of their unique tax benefits, REITs have the ability to attract tax-exempt investors and foreign investors with favorable tax treatment.

Public or Private REITs

REIT may be publicly traded or privately held.  Regardless, however, it must satisfy the applicable restrictions on ultimate beneficial ownership.

While non-traded REITs and exchange-traded REITs share many features, they differ in several key respects.

Publicly-traded REITs (whether equity or mortgage) are registered with the SEC and are publicly traded on a stock exchange.   Non-exchange traded REITS are registered with the SEC, but are not publicly traded. They are also subject to the same IRS requirements that an exchange-traded REIT must satisfy, including distributing at least 90 percent of taxable income to shareholders.

A REIT can utilize various capital structures, including issuing common equity, preferred equity and debt instruments.  However, a REIT that issues multiple classes of debt may be subjected to unfavorable tax consequences, much like those applicable to the holder of a residual interest in a REMIC.

Equity REITs, Mortgage REITs, and Hybrid REITs

REITS generally fall into three categories: equity REITs, mortgage REITs, and hybrid REITs.

Equity REITs.  Most REITs are equity REITs. Equity REITs typically own and operate income-producing real estate.

Mortgage REITs.  Mortgage REITs provide money to real estate owners and operators either directly in the form of mortgages or other types of real estate loans, or indirectly through the acquisition of mortgage-backed securities.

Hybrid REITs.  Hybrid REITs are generally companies that use the investment strategies of both equity REITs and mortgage REITs.

How is a REIT Taxed?

A REIT calculates taxable income much the same as other domestic corporations—however, it is entitled to a dividends-paid deduction.  Thus, a REIT is able to avoid taxation at the entity level by distributing its income as dividends.

Nonetheless, a REIT may be subject to an entity-level tax on certain income, such as REIT taxable income under section 857(a)(1), alternative minimum tax, built-in gains tax, personal holding company (PHC) tax, “net income from foreclosure property,” net income from “prohibited transactions, and certain other income.

REITS are required to use a calendar tax year and the accrual method of accounting.

Dividends paid by REITs generally are treated as ordinary income and are not entitled to reduced tax rates on other types of corporate dividends. For this reason, some investors prefer to own shares of a REIT or REIT fund inside a tax-deferred account (such as a retirement account) in order to defer paying taxes on the dividends received and any capital gains incurred from the REIT until they start withdrawing money from the tax-deferred account.

REITs file a Form 1120-REIT.  In addition, we find that a number of REITs may also be required to file one or more of the following non-exclusive list of IRS forms:

    1. Controlled a foreign partnership (that is, owned more than a 50% direct or indirect interest in the partnership).
    2. Owned at least a 10% direct or indirect interest in a foreign partnership while U.S. persons controlled that partnership.
    3. Had an acquisition, disposition, or change in proportional interest in a foreign partnership that:
      • Increased its direct interest to at least 10% or reduced its direct interest of at least 10% to less than 10%.
      • Changed its direct interest by at least a 10% interest.
    4. Contributed property to a foreign partnership in exchange for a partnership interest if:
      • Immediately after the contribution, the REIT owned, directly or indirectly, at least a 10% interest in the foreign partnership; or
      • The FMV of the property the REIT contributed to the foreign partnership in exchange for a partnership interest, when added to other contributions of property made to the foreign partnership during the preceding 12-month period, exceeds $100,000.

Also, the REIT may have to file Form 8865 to report certain dispositions by a foreign partnership of property it previously contributed to that foreign partnership if it was a partner at the time of the disposition. For more details, including penalties for failing to file Form 8865, see Form 8865 and its separate instructions.


Real Estate Investment Trust Attorneys

Freeman Law works with clients to plan and implement real-estate-based tax structures that accomplish their tax goals. Real Estate Investment Trusts (REITs) offer investors tax-efficient capital and growth opportunities. Interest rate changes and other market dynamics may impact the advantages of marquee office and residential property acquisitions and other transactions. Schedule a consultation or call (214) 984-3000 to discuss your REIT concerns or questions.