I’ve been approached by business associates looking to create a Real Estate Investment Trust. What are the advantages of a REIT?

Question: I’ve been approached by business associates looking to create a Real Estate Investment Trust (REIT). What are the advantages and general qualifications for creating a REIT?

Response: A real estate investment trust, or REIT, is a company that owns, and in most cases, operates income-producing real estate. Some REITs solely finance real estate. To qualify as a REIT, a company must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

The primary benefit of creating a REIT is to incur more favorable taxation status. If a non-REIT company were to invest in income-producing real estate, it would be subject to double taxation—taxation at the corporate level on the income earned, as well as dividend taxes to the dividend recipient. To ensure REIT status under the IRS code, some of the key baseline qualifications are that the RIET is owned by 100 persons or more, has 95 percent of its income derived from dividends, interest, and property income, pays dividends of at least 90% of the REIT's taxable income and at least 75% of total investment assets must be in real estate

While these qualifications are merely a starting point for considering a REIT, you should nevertheless contact an attorney to assist in the planning and creation of a REIT to ensure proper formation. Failure to properly form the REIT would end up denying you the potential favorable tax treatment.

Answered by Bert Gonzalez

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