How to Form a Real Estate Investment Trust (REIT) (2024)

The following offers a general summary of the basic tax law requirements applicable to REITs. To qualify as a REIT, an entity must meet a number of organizational, operational, distribution, and compliance requirements.

1. How must a real estate company be organized to qualify as a REIT?
2. How do REITs operate?
3. What are the dividend distribution requirements for a REIT?
4. What are the compliance rules for becoming a REIT?
5. Examples of Law Firms with REIT expertise
6. Examples of Accounting Firms with REIT expertise
7. Examples of Investment Banking Firms with REIT expertise
8. Other

1. How must a real estate company be organized to qualify as a REIT?

A U.S. REIT must be formed in one of the 50 states or the District of Columbia as an entity taxable for federal purposes as a corporation. It must be governed by directors or trustees and its shares must be transferable. Beginning with its second taxable year, a REIT must meet two ownership tests: it must have at least 100 shareholders (the 100 Shareholder Test) and five or fewer individuals cannot own more than 50% of the value of the REIT's stock during the last half of its taxable year (the 5/50 Test).

To ensure compliance with these tests, most REITs include percentage ownership limitations in their organizational documents. Due to the need to have 100 shareholders and the complexity of both of these tests, it is strongly recommended that tax and securities law counsel are consulted before forming a REIT.

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2. How do REITs operate?

A REIT must satisfy two annual income tests and a number of quarterly asset tests to ensure the majority of the REIT's income and assets are derived from real estate sources.

At least 75% of the REIT's annual gross income must be from real estate-related income such as rents from real property and interest on obligations secured by mortgages on real property. An additional 20% of the REIT's gross income must be from the above-listed sources or other forms of income such as dividends and interest from non-real estate sources (like bank deposit interest). No more than 5% of a REIT's income can be from non-qualifying sources, such as service fees or a non-real estate business.

Quarterly, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. A REIT cannot own, directly or indirectly, more than 10% of the voting securities of any corporation other than another REIT, a taxable REIT subsidiary (TRS) or a qualified REIT subsidiary (QRS). Nor can a REIT own stock in a corporation (other than a REIT, TRS or QRS) in which the value of the stock comprises more than 5% of a REIT's assets. Finally, the value of the stock of all of a REIT's TRSs cannot comprise more than 20% of the value of the REIT's assets.

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3. What are the dividend distribution requirements for a REIT?

FAQs

How to Form a Real Estate Investment Trust (REIT)? ›

The company must be taxed as a corporation and managed by trustees or a board of directors. There must be at least 100 shareholders, and no more than 50 percent of its shares can be held by five or fewer people. At least 90 percent of a REIT's taxable income each year must be paid out to shareholders as dividends.

Can I form my own REIT? ›

Your company will need at least 100 investors to be classified as a REIT. You don't necessarily need to get all 100 up front, since the IRS only requires you to meet that threshold by the beginning of the REIT's second tax year.

What is the 5 50 rule? ›

Five or fewer shareholders can't control more than 50% of the stock. Must pass annual income and quarterly asset tests, and. Must distribute 90% of its REIT taxable income each year.

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How many REITs should I own? ›

“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.

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What are the requirements for a REIT distribution? ›

A REIT must distribute at least 90% of taxable income in order to meet REIT testing requirements. It will pay tax on the remaining 10% of that income at a rate of 21%. A REIT is special because it can deduct dividends paid on its federal tax return to the extent it has earnings and profits.

How to Form a Real Estate Investment Trust (REIT) (2024)

FAQs

How to Form a Real Estate Investment Trust (REIT)? ›

What is the 5 50 rule? ›

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