Wednesday, August 23, 2023

Article: All Right, All Right, All REIT: Complexities and Considerations of Real Estate Investment Trusts

Xenia J.L. Garofalo and Hasnain Valika published an Article titled, All Right, All Right, All REIT: Complexities and Considerations of Real Estate Investment Trusts, ABA Probate & Property (July/August 2023). Provided below is the introduction:

Real estate remains a popular investment strategy for the masses. There are many ways to invest in real estate. A real estate investment trust, or REIT, is a preferred investment vehicle of choice because of its tax-efficient nature and general simplicity for the “common” investor (e.g., a noninstitutional, individual investor who invests her own capital). Buying shares in a REIT is as simple as buying shares in any major publicly traded corporation. But what exactly are REITs, and given their popularity, why aren’t they more prevalent?

A REIT allows investors to pool capital to participate in real estate ownership—think of it as a mutual fund for real estate. Investors receive tax advantages that are more commonly associated with larger and more sophisticated investors and businesses, yet also benefit from professional management of a diversified portfolio of real estate assets. But setting up a REIT is not without challenges. A REIT must meet various organizational, operational, income, and asset requirements. Taxation as a REIT entitles the entity to a dividends-paid deduction so that a REIT may not be required to pay any corporate-level income tax, rather than the normal double taxation applicable to “normal” US corporations. Although shareholders of a REIT must pay tax on the dividend income received (subject to certain exceptions), this results in a single level of tax payable by shareholders. Given these advantages, REITs are highly regulated, with their asset ownership, income, and activities scrutinized closely. Unsurprisingly, the administrative burden of maintaining REIT compliance can be costly.

This article aims to provide an overview of the wonderful world of REITs, including organizational requirements, distribution requirements, taxation, and certain nuanced complexities facing REITs, while also briefly addressing notable recently proposed rule changes. This article discusses certain US federal income tax considerations applicable to REITs but does not comprehensively discuss all tax considerations; for example, state and local taxes, indirect taxes, and payroll taxes are not covered.

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