Real Estate Investment Trust (REIT)
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs are structured to allow individual investors to earn a share of the income produced through commercial real estate ownership without having to purchase, manage, or finance property themselves.
REITs are often modeled after mutual funds; they pool capital from many investors to buy, develop, and manage a portfolio of properties or real estate loans. Most REITs are publicly traded on major stock exchanges, making them a liquid and accessible way to invest in real estate.
Key Features and Requirements
To qualify as a REIT and receive preferential tax treatment (avoiding corporate tax), a company must meet several specific requirements:
Asset Test: At least 75% of the REIT's total assets must be invested in real estate assets (like properties, mortgages, or shares in other REITs) or cash.
Income Test: At least 75% of the gross income must be derived from rents, mortgage interest, or gains from the sale of real estate.
Distribution Requirement: The REIT must distribute at least 90% of its annual taxable income to shareholders in the form of dividends. This is the primary reason REITs are known for offering high dividend yields.
Ownership Test: The company must be managed by a board of directors or trustees and have a minimum number of shareholders.
