What Is a REIT?
The initials REIT stand for Real Estate Investment Trust.
As one might quickly, and rightly, conclude from the name; a REIT is a corporate entity that invests in real estate. What makes REITs somewhat unique from other entities that might invest in real estate as part of their business is their tax status. To qualify as a REIT, a company must agree to distribute at least 90% of its earnings to its investors in the form of dividends. As a practical matter, many REITs distribute 100% of their income to investors such that they owe no corporate tax.
Characteristics of REITs
You might be surprised to discover that much of the real estate you see as you move about your daily life is owned by REITs. This can include everything from downtown Manhattan office buildings to suburban outlet malls to high-quality apartment complexes to mobile home parks.
As you might imagine, REITs derive most of their income from rents on such properties. If they invest well, they may also reap the benefits of capital gains. For example, a REIT may be able to acquire a property at a bargain price, perhaps due to the condition of the property or economic conditions, improve it, and later sell it for a higher price.
Currently, United States tax law allows most dividends paid by corporations to be taxed at a lower rate than an individual’s ordinary tax rate. This makes such dividends attractive to individuals who are in higher tax brackets. Since REITs are exempt from corporate tax, however, the majority of dividends received from a REIT are taxed at an individual’s ordinary tax rate. For this reason, many investors prefer to hold REITs in tax-deferred accounts, such as IRAs. Investors do well to analyze their personal tax situation or discuss it with their financial or tax advisor if considering investing in REITs.
For More Information
If you are interested in reading further about REITs, the following link provides what they describe as “REIT 101.” This resource addresses the topics I have touched on above, and many more, in much greater detail.
Disclosure: I am not a registered investment advisor or broker/dealer. Readers are cautioned that the material contained herein should be used solely for informational purposes, and are encouraged to consult with their financial advisor respecting the applicability of this information to their personal circumstances. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.