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Tax Advisory

How to Maintain REIT Status

  1. By Small Business Accounting Inc.
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To maintain REIT (real estate investment trust) status, a company must adhere to certain regulatory requirements set forth by the Internal Revenue Service (IRS) in the United States. Here are the key conditions that a REIT must meet to maintain its status:

To maintain REIT Status

1. Income Distribution:

  • The REIT must distribute at least 90% of its taxable income to its shareholders annually in the form of dividends. This ensures that the REIT is primarily serving as a pass-through entity, and the tax burden is shifted to the shareholders.

2. Real Estate Investment Focus:

  • At least 75% of the REIT’s total assets must be invested in real estate, cash, or U.S. Treasuries.
  • At least 75% of the REIT’s gross income should come from real estate-related sources, such as rents, interest from mortgages, or gains from the sale of real estate assets.
  • The remaining 25% of the assets can be invested in qualifying real estate assets, government securities, or cash.

3. Diversification Rules:

  • No more than 50% of the value of the REIT’s outstanding shares can be held by five or fewer individuals during the last half of the taxable year. This rule aims to prevent undue concentration of ownership.

4. Number of Shareholders:

  • The REIT must have at least 100 shareholders, ensuring a broad base of ownership.

5. Taxable Income Distribution:

  • At least 75% of the REIT’s gross income should be derived from rental income, interest from mortgages on real property, or gains from the sale of real estate assets.
  • The REIT can also earn income from dividends, interest from non-mortgage-related assets, and gains from the sale of securities.

6. Restrictions on Non-Qualified Income:

  • A REIT must not derive more than 25% of its gross income from sources other than real estate, rents, or interest from mortgages.

7. Real Estate Assets:

  • The REIT must not own any property used for personal use (e.g., personal residences).
  • Development and construction of real estate must be limited. Specifically, the REIT can’t hold undeveloped land for an extended period, and certain development and construction activities must be conducted through taxable REIT subsidiaries (TRS).

8. Distribution Deadlines:

  • The REIT has a grace period to distribute its taxable income to shareholders, typically within the first few months of the following year.

9. Reporting and Compliance:

  • The REIT must adhere to all necessary reporting and compliance requirements set by the IRS.

Conclusion

Maintaining REIT status involves complying with stringent tax regulations and meeting specific operational criteria. By adhering to these guidelines, REITs can enjoy tax advantages, which include avoiding corporate taxes and offering investors attractive dividend yields. To ensure compliance with these complex regulations, it is essential for REITs to work closely with experienced tax advisors and accounting professionals. At Small Business Accounting Inc., our team of experts is well-versed in REIT taxation and can help your business maintain its REIT status while maximizing its financial potential.

 
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