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Know more on “REIT” [Real estate investment trust ]

Posted on November 9th, 2012 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

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More and More companies are pursuing conversion to a real estate investment trust (REIT). Those who are exploring the whole new world of REIT can find this post useful to start with. Here to go:

reit

I. What is a REIT?

Is a tax designation for a company that invests in real estate that reduces or eliminates corporate income tax

In return, a REIT must distribute 90 percent of its taxable income to investors. The REIT structure was designed to provide a real estate investment structure similar to the structure that mutual funds provide for investment in stocks.

An entity that qualifies as a REIT under the Code is entitled to preferential tax treatment. It is a “pass-through” entity that can avoid most entity-level federal tax by complying with detailed restrictions on its ownership structure and operations.

REIT shareholders are taxed on dividends received from a REIT.

II. In layman language what is Meaning of REITs

  • This is collective investment device of commercial real estate
  • This is equity-type funding
  • This Owns, and in most cases operates, income-producing property (Equity REITs)
    • Office
    • Apartment
    • Retail (shopping centers)
    • Hotels
    • Warehouses (storage)
  • This is Essentially a tax-tool where equity funding of real estate is allowed on tax transparent basis upto minimum 90% dividend
  • REITs are typically listed and quoted

III. The Four Requirements You Must Know!

  • A REIT must distribute 90% of its annual income as dividends to its shareholders
  • A REIT must have at least 75% of its assets invested in real estate, mortgage loans, other REITs, cash, or government securities
  • A REIT must derive at least 75% of its gross income from rents, interest, and gains from sale
  • A REIT must have at least 100 shareholders and must have less then 50% of the outstanding shares concentrated in the hands of five or fewer shareholders

More details you can see under section "What are the required elements for forming a REIT?"

 

IV. When and why were REITs created?

REIT is essentially a tax term.

Congress passed the original REIT legislation in 1960 in order to provide a tax-preferred method by which average investors could invest in a professionally managed portfolio of real estate assets.

This Offer expert management and familiar corporate governance structures (BOD)

Many of the limitations imposed upon the operation of REITs and the taxes to which they are potentially subject are perhaps best understood in terms of the original notion that the activities of REITs were to consist predominantly of passive investments in real estate.

V. What types of REITs are there?

There are three types of REITs:

  1. equity REITs, which primarily own, or have an interest in, income-producing real estate;
  2. mortgage REITs, which originate or acquire mortgage loans and other debt obligations that are secured by real property;
  3. and hybrid REITs, which combine the equity REIT and mortgage REIT model and both owns commercial real estate and holds mortgages secured by commercial real estate

VI. What are the required elements for forming a REIT? [Adopted from U.S. SEC website]

In order to qualify for the tax benefits available to a REIT under the Code, the qualifying REIT entity must:

  • Be an entity that would be taxable as a corporation but for its REIT status;
  • Be managed by a board of directors or trustees;
  • Have shares that are fully transferable;
  • Have a minimum of 100 shareholders after its first year as a REIT;
  • Have no more than 50 percent of its shares held by 5 or fewer individuals during the last half of the taxable year;
  • Invest at least 75 percent of its total assets in real estate assets and cash;
  • Derive at least 75 percent of its gross income from real estate-related sources, including rents from real property and interest on mortgages financing real property;
  • Derive at least 95 percent of its gross income from such real estate sources and dividends or interest from any source; and
  • Have no more than 25 percent of its assets consist of non-qualifying securities or stock in taxable REIT subsidiaries

VII. What other countries have REITs?

A number of countries, including Australia, Brazil, Canada, Germany, India, Japan, Pakistan, Singapore and the United Kingdom have REIT-type legislation. The details of the rules may vary from the U.S. rules and from country to country.

VIII. What are the tax advantages of being a REIT?

REITs do not have to pay federal taxes at the corporate level

  • More specifically, REITs are allowed to deduct dividends paid to shareholders from taxable income, and thus have the ability to shield 100% of taxable income through distributions to shareholders
  • REIT shareholders still have to pay taxes on dividends and capital gains
  • Most states honor the REIT status and don’t require REITs to pay state taxes

 

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