Real Estate Investment Trusts (REITs)
Real estate investment trusts (“REITs”) have been around for more than fifty years. First established in the US by the US Congress in 1960 to allow individual investors to invest in large scale, income-producing real estate. REITs were introduced in Israel in 2006. REITs provide a way for individual investors to earn a share of the income produced through real estate ownership – without actually having to go out and buy commercial real estate.
What is a REIT?
A REIT, generally, is a company that owns – and typically operates – income producing real estate or real estate-related assets. The income-producing real estate assets owned by a REIT may include office buildings, shopping malls, apartments, and hotels. Most REITs specialize in a single type of real estate – for example, apartment communities. There are retail REITs, office REITs, residential REITs, healthcare REITs, and industrial REITs, to name a few. What distinguishes REITs from other real estate companies is that a REIT must acquire and develop its real estate properties primarily to operate them as part of its own investment portfolio, as opposed to reselling those properties after they have been developed.
How to Qualify as a REIT?
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. A company that qualifies as a REIT is allowed to deduct from its corporate taxable income all of the dividends that it pays out to its shareholders. Because of this special tax treatment, most REITs pay out at least 90 percent and often 100 percent of their taxable income to their shareholders and, therefore, owe no corporate tax.
In addition to paying out at least 90 percent of its taxable income annually in the form of shareholder dividends, a REIT must:
- Be an entity that would be taxable as a corporation but for its REIT status;
- Be managed by a board of directors or trustees;
- Have shares that are fully transferable (publicly-traded);
- Invest at least 75 percent of its total assets in real estate assets and cash; and
- 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;
Investing in REITs
As with any investment, you should take into account your own financial situation, consult your financial adviser, and perform thorough research before making any investment decisions concerning REITs. You should review a REIT’s disclosure filings, including any offering prospectus. You can invest in a publicly traded REIT, which is listed on a major stock exchange, by purchasing shares through a broker (as you would other publicly traded securities). Generally, you can purchase the common stock or debt securities of a publicly traded REIT.
Special Tax Considerations
The shareholders of a REIT are responsible for paying taxes on the dividends that they receive and on any capital gains associated with their investment in the REIT. Dividends paid by REITs generally are treated as ordinary income and are not entitled to the reduced tax rates on other types of corporate dividends. Finally, a REIT is not a pass-through entity. This means that, unlike a partnership, a REIT cannot pass any tax losses through to its investors.
To obtain further information about REITs, related tax and accounting issues, or business questions generally, please contact Dov Weinstein at Weinstein & Co. at 077-738-6666 or dov@wcpa.co.il
