REITs are corporations that manage stock portfolios, only the stocks are not investments in companies, but rather portfolios of real estate and mortgages. REIT stands for real estate investment trust. Anyone can buy shares in a REIT that is publicly traded, without having to individually finance a real estate transaction. REIT shares can be bought and sold easily, so they have the advantage of liquidity and are income-producing. Small investors benefit from being able to own real estate without the investment, and without having to deal with landlord problems.
To qualify as a REIT, companies have to pay out at least 90 percent of their taxable income to shareholders each year. The dividends are deducted from the corporation's taxable income. In this way the corporation retains the status known as a pass-through entity, and it does not have to pay corporate, federal or state income tax. The shareholders have to pay the income tax, but they do not share in tax losses, even though they are investors.
To qualify for the status of pass-through entity as a REIT, corporations must be managed by a board of directors or trustees. They must have a minimum of 100 shareholders, and the shares must be fully transferable. At least 90 percent of the corporation's taxable income must be paid out in dividends to the investors. (Most REITS pay out 100 percent of their taxable income.) Less than half of the REIT shares can be held by five or fewer investors during the second half of each year. Most of the REIT investments, at least 75 percent, must be in real estate. Stocks in REIT subsidiaries can't be more than 20 percent of the corporation's assets. A REIT's gross income must come from at least 95 percent of its financial investments and at least 75 percent from real estate sources.