Want to get smart on REIT tax? These investment vehicles are rising in popularity, but potential investors may not know where to start. Below, we answer some frequently asked questions about the changing REIT tax landscape, from basic definitions to potential benefits. Q. What is a REIT? A. A real estate investment trust (REIT) is essentially a mutual fund for real estate. As a corporate matter, it is typically organized as a Delaware or Maryland corporation, a Delaware limited liability company, or a Maryland real estate investment trust. As a tax matter, a REIT election is made upon filing of a tax return on Form 1120-REIT. Q. Why were REITs created? A. Congress created REITs in 1960 to make income-producing real estate investments accessible to retail investors. Today, publicly traded REITs are popular among retail investors. In addition to publicly traded REITs, there are public non-listed REITs (ie, REITs that are registered with the SEC but do not trade on national stock exchanges) and private REITs (ie, REITs that are exempt from SEC registration and do not trade on national stock exchanges). Private REITs are often used as private investment vehicles by private funds, sovereign wealth funds, foreign pension funds, US pension funds and other tax-sensitive investors. Q. What are some of the tax benefits of a REIT? A. In some ways, a REIT combines the best tax attributes of a partnership and a corporation. Like a partnership, a REIT is typically not subject to an entity-level tax. Unlike partnerships which are flow-through entities for tax purposes, REITs generally avoid entity-level tax by virtue of receiving a dividends paid deduction and by effectively being required to distribute all of their earnings and profits each year. However, like a corporation, REITs provide investors with simplified tax compliance (ie, Form 1099 instead of a Schedule K-1). Q. Are there special REIT tax benefits for foreign investors? A. A REIT can be an attractive investment vehicle for sovereign wealth funds, foreign pension funds, and certain income tax treaty eligible foreign investors. In some instances, these investments can be structured to have zero US federal income tax leakage and no US federal income tax return filing requirements. Q. Are there special REIT tax benefits for US tax-exempt investors? A. A REIT is also an attractive investment vehicle for many types of US tax-exempt investors. Some tax-exempt investors are sensitive to generating unrelated business taxable income (UBTI). A REIT can be an effective UBTI blocker for tax-exempt investors and may be an appropriate alternative to the “fractions rule,” which may be burdensome. Q. How do you qualify as a REIT? A. In addition to electing REIT status upon filing of a tax return on Form 1120-REIT, a REIT must comply with various organizational and operational requirements under the Internal Revenue Code, including certain distribution requirements. REITs typically engage a REIT tax advisor to perform quarterly and annual REIT testing to assist with REIT compliance matters. Q. What types of assets do REITs typically invest in? A. REITs are typically in the rental business or the mortgage business. This includes office, residential, hotels, senior housing, and self-storage, among others. Q. Can a REIT build and sell luxury condos? A. In general, a REIT cannot be a dealer in real property. If a REIT engages in dealer activity, it is penalized with a 100-percent excise tax on gains from such activities. Activities such as building luxury condos for the purpose of flipping such condos would be outside the scope of activities in which a REIT can engage. However, in certain circ*mstances, and with appropriate tax planning, a REIT may develop and ultimately sell real property. Q. Do I need to drastically change how I operate my real estate rental business if I decide to become a REIT? A. A REIT is required to operate in compliance with the REIT tax rules in order to maintain its REIT status. With the help of a REIT tax advisor, REITs can generally structure their real estate operations to fall within the REIT tax rules (usually without too much pain from a business perspective). Q. What is a taxable REIT subsidiary? A. A taxable REIT subsidiary (TRS) is a subsidiary of the REIT that is a taxable corporation. It is a more flexible vehicle that can be used to perform certain activities that the REIT is not permitted to perform under the REIT tax rules. For example, a TRS is often engaged by the REIT to perform services for tenants (so-called “impermissible tenant services”) that the REIT is not permitted to perform directly for tenants under the REIT tax rules. A TRS is also often used in senior housing and hotel REITs. About DLA Piper’s National REIT Tax practice DLA Piper’s National REIT Tax practice has in-depth knowledge and experience with US-listed public REITs, Singapore-listed public REITs, non-traded public NAV REITs, and private REITs. We advise on the acquisition, disposition, and operation of real estate assets through fund, REIT, and joint venture vehicles. Our attorneys are recognized as industry leaders and regularly publish articles in legal and trade publications and actively participate in real estate and REIT industry organizations. For more information, please check out our REIT Tax Resource Center and this snapshot of our team.
FAQs
What are the tax rules for REITs? ›
The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes Qualified REIT Dividends through Dec.
How do REITs avoid double taxation? ›Unlike many companies however, REIT incomes are not taxed at the corporate level. That means REITs avoid the dreaded “double-taxation” of corporate tax and personal income tax. Instead, REITs are sheltered from corporate taxes so their investors are only taxed once.
What is the 90 rule for REITs? ›To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
How are taxable REIT subsidiaries taxed? ›What are Taxable REIT Subsidiaries? A TRS is a corporation that is owned either directly or indirectly by a REIT and has made an election jointly with the REIT to be a TRS for tax purposes. A TRS is subject to regular corporate income tax, which stands currently at 21% because of the Tax Cuts and Jobs Act.
Is it OK to hold REITs in a taxable account? ›This makes them a great type of dividend investment to hold in tax-advantaged retirement accounts like traditional IRAs, Roth IRAs, and 401(k)s. In this scenario, you wouldn't need to keep track of the cost basis from ROC. It's also okay to own REITs in taxable accounts.
Are REITs bad for taxable accounts? ›REITs and REIT Funds
Real estate investment trusts are a poor fit for taxable accounts for the reason that I just mentioned. Their income tends to be high and often composes a big share of the returns that investors earn from them, as REITs must pay out a minimum of 90% of their taxable income in dividends each year.
Avoiding REIT dividend taxation
If you own REITs in an IRA, you won't have to worry about dividend taxes each year, nor will you have to pay taxes in the year in which you sell a REIT at a profit. In a traditional IRA, you won't owe any taxes until you withdraw money from the account.
Instead of passing through all items of gain, loss, deduction, and credit to its partners to avoid double taxation, a REIT avoids double taxation via a “dividend paid deduction.” The dividend paid deduction reduces the REIT's taxable income dollar-for-dollar based on the amount of dividends paid — or deemed paid — to ...
What kind of tax return does a REIT file? ›About Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts.
Are REITs subject to double taxation? ›First, REITs do not pay U.S. federal corporate income taxes on REIT taxable income distributed to investors, meaning investors avoid the “double taxation” that applies to non-REIT corporations, which are liable for taxes at both the corporate and individual shareholder level.
What is the REIT 10 year rule? ›
The final regulations (i) provide a 10-year “transition rule” that grandfathers current structures, subject to certain requirements, and thus allows certain entities to continue to be treated as D-REITs for ten years and (ii) narrow the scope of the “look through” rule, pursuant to which REIT stock owned by certain ...
Is REIT taxed on undistributed capital gains? ›Form 8612 is used by real estate investment trusts (REITs) to figure and pay the excise tax on undistributed income under section 4981. The excise tax is 4% of the excess, if any, of the required distribution over the distributed amount.
Where do I report REIT income on tax return? ›Use Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts, to report the income, gains, losses, deductions, credits, certain penalties; and to figure the income tax liability of a REIT.
Does a REIT file a tax return? ›Generally, a REIT must file its income tax return by the 15th day of the 4th month after the end of its tax year.
Are REITs taxed as qualified dividends? ›REIT dividends are not qualified because the IRS considers them as pass-through income. These are profits that get distributed to investors without the entity paying taxes first. REIT dividends pass to investors as ordinary income. The IRS taxes the dividends according to the individual investor's income tax rate.
What are the distribution rules for REITs? ›Real estate companies generally earn reliable streams of income from long and stable tenant leases, and REITs must distribute at least 90 percent of their taxable income to shareholders as dividends.
What are the pros and cons of REITs? ›Real estate investment trusts reduce the barrier to entry for investors in the real estate market and provide liquidity, regular income and other perks. However, you'll be exposed to risks that aren't inherent in the stock market and dividends are subject to ordinary income tax.
Is income distributed from REIT investments is taxed at 15%? ›Qualified dividends can also come from companies such as MSFT, AAPL, and JNJ. As an example of how a qualified dividend is taxed: An investor earns $1000 in dividends from a REIT. At a 15% qualified dividend tax rate, the investor will pay $150 in taxes.