real estate investment trust (REIT)

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A Real Estate Investment Trust (REIT) is a company that invests in income-generating real estate. REITs are held by shareholders, who receive dividends from the various real estate investments that the company makes. One main draw for investors to become shareholders in a REIT is that they enable smaller investors who cannot made diversified real estate investments on their own to purchase a securitized share in a REIT, which does have a diversified portfolio of real estate assets. That is, just as a mutual fund allows an investor to buy a share in the fund—which has a diversified stock portfolio, instead of purchasing all the share represented in the fund—so to a REIT enables investors to buy a share in the REIT, which has diversified real estate asset holdings, so that investors do not have to purchase all the real estate assets that the REIT holds.

Another draw for investors is that REITs are not subject to the double taxation of corporations. That is, normally, shareholders’ ownership interest in their owned corporation are taxed twice—once when the corporation generates revenue, and again when the corporation distributes its earnings to the shareholders in the form of dividends. However, if a company satisfies Internal Revenue Code (IRC) § 856, then, IRC § 857 excludes the company’s dividend distributions from the company’s taxable income. IRC § 856(a) lays out the follow basic requirements a company must meet to qualify as a REIT: a company “(1) which is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (3) which (but for the provisions of this part) would be taxable as a domestic corporation; (4) which is neither (A) a financial institution referred to in § 582(c)(2), nor (B) an insurance company to which subchapter L applies; (5) the beneficial ownership of which is held by 100 or more persons; (6) subject to the provisions of subsection (k), which is not closely held (as determined under subsection (h)); and (7) which [does not fall within any of the limitations of] (c).”

Furthermore, REITs may be issued pursuant to a public offering, in which case the issuance of the REIT securities complies with the Securities Act of 1933, or they may be issued in a private placement. When REITs are issued in a private placement, they are referred to as private REITs. The issuance of private REITs is usually done through SEC Regulation D and Rule 144A, which is generally limited to accredited investors.

[Last updated in December of 2020 by the Wex Definitions Team]