a type of investment company that invests money (obtained through the sale of its shares to investors) in mortgages and various types of investment in real estate, in order to earn profits for shareholders. Shareholders receive income from the rents received from the properties and receive capital gains as properties are sold at a profit. REITs have been formed by a number of large financial institutions such as banks and insurance companies. The stocks of many of them are traded on security exchanges, thereby providing investors with a marketable interest in a real estate investment portfolio. REITs that distribute all of their income generally pay no entity-level tax. However, in exchange for this special tax treatment, REITs are subject to numerous qualifications and limitations including: (1) Shareholder qualifications. Generally, REITs are not permitted to be closely held and must have a minimum of 100 shareholders. (2) Qualified asset and income tests. REITs are required to have at least 75% of their value represented by qualified real estate assets and to earn at least 75% of their income from real estate investments.
investor-owned corporation, trust or association that sells shares to investors and invests in income-producing property. A REIT is exempt from federal corporation taxes, provided that it distributes 95% or more of its income to investors, although shareholder dividends are fully taxable. Assets of a REIT are managed by one or more trustees who control its acquisitions and investments. An equity REIT owns and operates income property, such as shopping centers and apartment buildings; a mortgage reit lends money to developers, holding a construction mortgage or long-term mortgage as security.
a real estate mutual fund, allowed by income tax laws to avoid the corporate income tax. It sells shares of ownership and must invest in real estate or mortgages. It must meet certain other requirements, including minimum number of shareholders, widely dispersed ownership, and asset and income tests. If it distributes 95% of its income to shareholders, it is not taxed on that income, but shareholders must include their share of the REIT's income in their personal tax returns. Its unique feature is to allow small investors to participate, without double taxation, in large real estate ventures.
company, usually traded publicly, that manages a portfolio of real estate to earn profits for shareholders. Patterned after investment companies, REITs make investments in a diverse array of real estate such as shopping centers, medical facilities, nursing homes, office buildings, apartment complexes, industrial warehouses, and hotels. Some REITs, called equity reits, take equity positions in real estate; shareholders receive income from the rents received and from the properties and receive capital gains as buildings are sold at a profit. Other REITs specialize in lending money to building developers; such mortgage reits pass interest income on to shareholders. Some REITs, called hybrid REITs, have a mix of equity and debt investments. To avoid taxation at the corporate level, 75% or more of the REIT's income must be from real property and 95% of its net earnings must be distributed to shareholders annually. Because REITs must distribute most of their earnings, they tend to pay high yields of 5% to 10% or more.
a real estate mutual fund, allowed by income tax laws to avoid the corporate income tax. It sells shares of ownership and must invest in real estate or mortgages. It must meet certain other requirements, including minimum number of shareholders, widely dispersed ownership, asset and income tests. If it distributes 95% of its income to shareholders, it is not taxed on that income, but shareholders must include their share of the REIT's income in their personal tax returns.
In the early 1990s, REITs were embraced by investors because of their relatively high yields. Many REITs developed market niches by investing in certain types of properties in specific geographic areas (e.g., apartments in Atlanta). Still, restrictions placed on them by tax law caused REITs to be considered a more desirable investment medium than limited partnerships.
