Treasury and IRS Allow Public REITs to Use Up to 90% Stock to Satisfy 2021 and First Half of 2022 Distribution Requirements (2024)

FAQs

What is the 90% rule for REITs? ›

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.

Invest at least 75% of its total assets in real estate. Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate. Pay at least 90% of its taxable income in the form of shareholder dividends each year.

Answer: First, if a REIT pays out more than 100% of its taxable income, then a portion of the dividend in excess of taxable income is considered a return of capital. The return of capital component is not taxed in the year it is received, but rather is taxed when the REIT shares are sold.

The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes Qualified REIT Dividends through Dec.

The easiest way to do it is with the 90/10 rule. It goes like this: 90% of your contributions go to safe, boring investments like low-cost total stock market index funds. The remaining 10% is yours to play with.

A REIT must distribute at least 90% of taxable income in order to meet REIT testing requirements. It will pay tax on the remaining 10% of that income at a rate of 21%. A REIT is special because it can deduct dividends paid on its federal tax return to the extent it has earnings and profits.

For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.

Public REITs are currently required to disclose in their quarterly reports on Form 10-Q and annual reports on Form 10-K any purchase, aggregated on a monthly basis, made by or on behalf of the issuer or any “affiliated purchaser” of shares or other units of any class of the issuer's equity securities registered under ...

Because REITs are corporations, they are subject to double taxation. The difference between EPS (earnings per share) and FFO (funds from operations) is the interest deduction. REITs are required to pay out 90 percent of their earnings as dividends or they will face penalties.

REITs and REIT Funds

Real estate investment trusts are a poor fit for taxable accounts for the reason that I just mentioned. Their income tends to be high and often composes a big share of the returns that investors earn from them, as REITs must pay out a minimum of 90% of their taxable income in dividends each year.

How do I avoid taxes on REIT? ›

Unlike partnerships which are flow-through entities for tax purposes, REITs generally avoid entity-level tax by virtue of receiving a dividends paid deduction and by effectively being required to distribute all of their earnings and profits each year.

Unlike many companies however, REIT incomes are not taxed at the corporate level. That means REITs avoid the dreaded “double-taxation” of corporate tax and personal income tax. Instead, REITs are sheltered from corporate taxes so their investors are only taxed once.

If you own shares in a REIT, you should receive a copy of IRS Form 1099-DIV each year. This tells you how much you received in dividends and what kind of dividends they were: Ordinary income dividends are reported in Box 1. Qualified dividends in Box 1b.

Capital Gain Dividend – When a REIT realizes capital gains, it must designate a portion of the dividends distributed to its shareholders as a capital gain dividend, or potentially pay a tax. For shareholders, a capital gain dividend is treated in the same way as any capital gain and is subject to preferential rates.

Real estate investment trusts (REITs) that trade publicly on stock market exchanges are traditionally the easiest and lowest-cost way to invest in real estate to collect passive income.

30% Rule. This rule was introduced with the Tax Cut and Jobs Act (TCJA) and is part of Section 163(j) of the IRS Code. It states that a REIT may not deduct business interest expenses that exceed 30% of adjusted taxable income. REITs use debt financing, where the business interest expense comes in.

General requirements

A REIT cannot be closely held. A REIT will be closely held if more than 50 percent of the value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals at any point during the last half of the taxable year, (this is commonly referred to as the 5/50 test).