A real estate investment trust, or REIT, is a company that owns and, in most cases, operates income-producing real estate such as apartments, shopping centers, offices, hotels and warehouses. These trusts allow investors to pool funds to participate in real estate without necessarily committing large amounts of capital. REITs also enjoy special tax treatment. In order to qualify as a REIT with the IRS, the trust must distribute at least 90% of its taxable profits to shareholders in the form of dividends. Consequently, most REITs pay no corporate income tax.
Taxes are paid by shareholders on the dividends received and any capital gains. Most states honor this federal treatment and also do not require REITs to pay state income tax. However, like other businesses, but unlike partnerships, a REIT cannot pass any tax losses through to its investors.
While most REITs are traded on major exchanges, some are privately held. These trusts are much less liquid than exchange-traded REITs. There are no formal market mechanisms in place to provide information about the fair value of private REITs or to facilitate their sale. 1st Trade can provide information on the value of comparable assets and solicit bids from its network of investors in illiquid assets.
NOTE: D-MERC and 1st Trade do not provide tax advice. Please consult your tax professional to help answer questions regarding how tax laws apply to you and/or your business.