What Is a REIT?
A REIT is an investment company that owns and operates income-producing real estate and sometimes finances real-estate transactions, profiting from the interest received during the borrower's payback. REIT shares are a good choice for anyone with a desire to invest in real estate, but they are especially useful for investors who do not have the cash, desire, or time to deal with the purchase of individual properties. Investors can buy shares anytime they have additional cash to invest and then watch their investment grow as the funds are managed by professionals with expertise in the field of real-estate investments.
A REIT is a pass-through entity, which means its profits are passed on to its shareholders. The Internal Revenue Service requires each REIT to pay out at least 90 percent of its taxable income and capital gains to shareholders every year. Individual investors pay taxes on their gains, but the REIT itself is not taxed. A REIT must satisfy several IRS rules before it is granted this tax-exempt status.
At least 75 percent of a REIT's assets must be in the form of real estate, cash, or mortgages, and there are strict IRS rules regarding the source of each trust's income and the control of its shares. There must be at least 100 shareholders, and shares must be transferable. No more than 50 percent of a REIT's shares may be held by five or fewer individuals during the last half of a taxable year. These and other IRS rules were put in place to help ensure that a REIT is governed by its shareholders and not by the wishes of a few individuals.
What about UPREITs?
These are REITs that own a controlling interest in another company that owns real estate, rather than directly owning the real estate in the name of the REIT.