REITs, or real estate investment trusts, are often described as a mutual fund for real estate. Congress established REITs to allow individual investors to invest in large-scale, income-producing real estate. Since their introduction in 1960, REITS have grown in popularity and are commonplace in real estate property ventures, including multi-family residential, industrial, retail, office, self-storage, single-family housing and others.

REITs are subject to a several initial qualification rules as well as ongoing rules to maintain REIT status. REITs may be publicly traded or private, and generally fall into three categories: equity REITs, mortgage REITs, and hybrid REITs.

What is a REIT?

A REIT is a corporation, trust or association that owns (and typically manages and operates) income-producing real estate or real estate-related assets. REITs pool the capital of numerous investors to purchase a portfolio of properties.

More technically, a REIT is a qualifying entity that satisfies several federal tax requirements and elects to be taxed as a REIT. To qualify as a REIT, an organization must:

• be organized as a corporation, trust, or association.
• be managed by one or more trustees or directors.
• have beneficial ownership evidenced by transferable shares, or by transferable certificates of beneficial interest that are held by 100 or more persons. (This requirement applies beginning in its 2nd tax year.)
• be taxed as a domestic corporation, but for the Code’s REIT provisions (section 856 through 860 of the Code).
• not be a financial institution or a subchapter L insurance company.
• not be closely held, as defined in section 856(h). (This requirement applies beginning in its 2nd tax year.)

In addition, a REIT must also satisfy the following requirements:

• Invest at least 75 percent of its total assets in real estate assets and cash
• Derive at least 75 percent of its gross income from real estate related sources, including rents from real property and interest on mortgages financing real property
• Derive at least 95 percent of its gross income from such real estate sources and dividends or interest from any source
• Distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends
• no more than 25 percent of its assets may consist of non-qualifying securities or stock in taxable REIT subsidiaries

Benefits of REIT Status

A company that qualifies as a REIT is allowed to deduct the dividends that it pays out to its shareholders. Because of this special tax treatment, most REITs pay out 100 percent of their taxable income to their shareholders and, therefore, owe no corporate tax. Because of their unique tax benefits, REITs have the ability to attract tax-exempt investors and foreign investors with favorable tax treatment.

Public or Private REITs

A REIT may be publicly traded or privately held. Regardless, however, it must satisfy the applicable restrictions on ultimate beneficial ownership.

While non-traded REITs and exchange-traded REITs share many features, they differ in several key respects.

Publicly-traded REITs (whether equity or mortgage) are registered with the SEC and are publicly traded on a stock exchange. Non-exchange traded REITS are registered with the SEC, but are not publicly traded. They are also subject to the same IRS requirements that an exchange-traded REIT must satisfy, including distributing at least 90 percent of taxable income to shareholders.

A REIT can utilize various capital structures, including issuing common equity, preferred equity and debt instruments. However, a REIT that issues multiple classes of debt may be subjected to unfavorable tax consequences, much like those applicable to the holder of a residual interest in a REMIC.

Equity REITs, Mortgage REITs, and Hybrid REITs

REITS generally fall into three categories: equity REITs, mortgage REITs, and hybrid REITs.

Equity REITs. Most REITs are equity REITs. Equity REITs typically own and operate income-producing real estate.

Mortgage REITs. Mortgage REITs provide money to real estate owners and operators either directly in the form of mortgages or other types of real estate loans, or indirectly through the acquisition of mortgage-backed securities.

Hybrid REITs. Hybrid REITs are generally companies that use the investment strategies of both equity REITs and mortgage REITs.

How is a REIT Taxed?

A REIT calculates taxable income much the same as other domestic corporations—however, it is entitled to a dividends-paid deduction. Thus, a REIT is able to avoid taxation at the entity level by distributing its income as dividends.

Nonetheless, a REIT may be subject to an entity-level tax on certain income, such as REIT taxable income under section 857(a)(1), alternative minimum tax, built-in gains tax, personal holding company (PHC) tax, “net income from foreclosure property,” net income from “prohibited transactions, and certain other income.

REITS are required to use a calendar tax year and the accrual method of accounting.

Dividends paid by REITs generally are treated as ordinary income and are not entitled to reduced tax rates on other types of corporate dividends. For this reason, some investors prefer to own shares of a REIT or REIT fund inside a tax-deferred account (such as a retirement account) in order to defer paying taxes on the dividends received and any capital gains incurred from the REIT until they start withdrawing money from the tax-deferred account.

REITs file a Form 1120-REIT. In addition, we find that a number of REITs may also be required to file one or more of the following non-exclusive list of IRS forms:

Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report certain transfers to foreign corporations under section 6038B.

Form 965, Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System.

Form 965-B,Corporate and Real Estate Investment Trust (REIT) Report of Net 965 Tax Liability and Electing REIT Report of 965 Amounts. Form 965-B is used to report includable and deferred net section 965 inclusions for taxable years beginning with the tax year ended 2017.

Form 966, Corporate Dissolution or Liquidation, to report the adoption of a resolution or plan to dissolve the corporation or liquidate any of its stock.

Form 976,Claim for Deficiency Dividends Deductions by a Personal Holding Company, Regulated Investment Company, or a Real Estate Investment Trust, to claim a deduction for deficiency dividends. See section 860 and the related regulations.

Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, to report and send withheld tax on payments or distributions made to nonresident alien individuals, foreign partnerships, or foreign corporations to the extent these payments constitute gross income from sources within the United States.

Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, to report and send withheld tax on payments or distributions made to nonresident alien individuals, foreign partnerships, or foreign corporations to the extent these payments constitute gross income from sources within the United States.

Form 1042-T, Annual Summary and Transmittal of Forms 1042-S.

Form 1099-DIV, Dividends and Distributions, to report certain dividends and distributions.

Form 2438, Undistributed Capital Gains Tax Return, if the REIT designates undistributed net long-term capital gains under section 857(b)(3)(C).

Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, must be completed and a copy given to each shareholder for whom the REIT paid tax on undistributed net long-term capital gains under section 857(b)(3)(C).

Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, if the REIT received a distribution from a foreign trust or if the REIT was a grantor of, transferor of, or transferor to a foreign trust that existed during the tax year.

Form 5471,Information Return of U.S. Persons With Respect to Certain Foreign Corporations, if the REIT is a U.S. shareholder of a controlled foreign corporation, a specified foreign corporation, or otherwise subject to the reporting requirements of section 6038 or 6046, and the related regulations.

Form 5472,Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. This form is filed if the REIT is 25% or more foreign owned.

Form 6198,At-Risk Limitations, if a REIT is closely held as described in section 465(a)(1)(B), and (1) directly or indirectly has any amounts not at risk that are invested in an at-risk activity that incurred a loss; or (2) engages in certain activities and has borrowed amounts not at risk. See section 465 and the Instructions for Form 6198.

Form 8275,Disclosure Statement, and Form 8275-R, Regulation Disclosure Statement, to disclose items or positions taken on a tax return that are not otherwise adequately disclosed on a tax return or that are contrary to Treasury Regulations (to avoid parts of the accuracy-related penalty or certain preparer penalties).

Form 8300,Report of Cash Payments Over $10,000 Received in a Trade or Business, to report the receipt of more than $10,000 in cash or foreign currency in one transaction or a series of related transactions.

Form 8612,Return of Excise Tax on Undistributed Income of Real Estate Investment Trusts, if the REIT is liable for the 4% excise tax on undistributed income imposed under section 4981.

Form 8621,Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, if the REIT is a direct or indirect shareholder of a passive foreign investment company, as defined in section 1297(a).

Form 8810, Corporate Passive Activity Loss and Credit Limitations, if a REIT is closely held as described in section 469(j)(1), and has losses or credits from passive activities.

Form 8865, Return of U.S. Persons With Respect To Certain Foreign Partnerships. A REIT may have to file Form 8865 if it:

1. Controlled a foreign partnership (that is, owned more than a 50% direct or indirect interest in the partnership).
2. Owned at least a 10% direct or indirect interest in a foreign partnership while U.S. persons controlled that partnership.
3. Had an acquisition, disposition, or change in proportional interest in a foreign partnership that:
   • Increased its direct interest to at least 10% or reduced its direct interest of at least 10% to less than 10%.
   • Changed its direct interest by at least a 10% interest.
4. Contributed property to a foreign partnership in exchange for a partnership interest if:
   • Immediately after the contribution, the REIT owned, directly or indirectly, at least a 10% interest in the foreign partnership; or
   • The FMV of the property the REIT contributed to the foreign partnership in exchange for a partnership interest, when added to other contributions of property made to the foreign partnership during the preceding 12-month period, exceeds $100,000.

Also, the REIT may have to file Form 8865 to report certain dispositions by a foreign partnership of property it previously contributed to that foreign partnership if it was a partner at the time of the disposition. For more details, including penalties for failing to file Form 8865, see Form 8865 and its separate instructions.

Form 8875, Taxable REIT Subsidiary Election, is filed jointly by a corporation and a REIT to have the corporation treated as a taxable REIT subsidiary.

Form 8927,Determination Under Section 860(e)(4) by a Qualified Investment Entity, to make a determination under section 860(e)(4) and to establish the date of determination for purposes of making a deficiency dividend distribution.

Form 8937, Report of Organizational Action Affecting Basis of Securities. Use this form when any organizational action affects the basis of holders of either a security or a class of the security. For example, a REIT may use this form in connection with transactions such as a nontaxable cash or stock distribution to shareholders, or a conversion rate adjustment on a convertible debt instrument that results in a distribution under section 305(c). However, a REIT that reports undistributed capital gains to shareholders on Form 2439 can satisfy the organizational action reporting requirements for those undistributed gains if the REIT timely files and gives Form 2439 to all proper parties for the organizational action. For more information, see the Instructions for Form 8937.

Form 8975, Country-by-Country Report. Certain U.S. persons that are the ultimate parent entity of a U.S. multinational enterprise group with annual revenue for the preceding reporting period of $850 million or more are required to file Form 8975. Form 8975 and its Schedules A (Form 8975) must be filed with the income tax return of the ultimate parent entity of a U.S. multinational enterprise group for the tax year in or within which the reporting period covered by Form 8975 ends. The first required reporting period for an ultimate parent entity is the 12-month reporting period that begins on or after the first day of a tax year of the ultimate parent entity that begins on or after June 30, 2016. For more information, see Form 8975, Schedule A (Form 8975) and the Instructions for Form 8975 and Schedule A (Form 8975).

Form 8990, Limitation on Business Interest Expense Under Section 163(j), to calculate the amount of business interest expense you can deduct and the amount to carry forward to the next year.

Form 8992,U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), to figure the domestic corporation’s GILTI under section 951A and attach it to Form 1120-REIT.

Form 8996, Qualified Opportunity Fund, to certify that the REIT organized as a qualified opportunity fund (QOF) to invest in qualified opportunity zone property. In addition, a QOF REIT files Form 8996 annually to report that it meets the 90% investment standard of section 1400Z-2 or to compute the penalty if it fails to meet the investment standard.

Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) investments, to report investments in one or more QOFs. Report the amount of deferred gains invested in QOFs for the current tax year, which include capital gains deferred and invested in QOFs and disposal investments in QOFs, and the amount of deferred gains invested in QOFs at the end of the current tax year.

[View source.]