REIT
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate across a range of property sectors, and is required by U.S. tax law to distribute at least 90% of its taxable income to shareholders annually as dividends. REITs allow ordinary investors to access diversified real estate exposure through publicly traded securities without directly owning property.
Congress created the REIT structure in 1960 through legislation signed by President Eisenhower, with the explicit goal of giving all Americans — not just the wealthy — a way to invest in large-scale, income-producing real estate. Prior to REITs, commercial real estate investment was largely inaccessible to individual investors due to the large capital requirements involved in directly acquiring office buildings, shopping centers, apartment complexes, or industrial facilities. The REIT structure solved this problem by pooling investor capital in a publicly traded vehicle, analogous to how mutual funds provide access to diversified stock portfolios.
To qualify as a REIT under Internal Revenue Code Section 856, a company must meet several criteria set by the IRS. It must invest at least 75% of its total assets in real estate assets. At least 75% of its gross income must come from real estate-related sources such as rents from real property or interest on mortgages. It must have a minimum of 100 shareholders after its first year as a REIT, and no five individuals can own more than 50% of its shares during the second half of any taxable year (the 5/50 rule). Critically, it must distribute at least 90% of its taxable income to shareholders annually. This distribution requirement is why REITs typically offer above-average dividend yields compared to other equities.
REITs are broadly classified into three types. Equity REITs own and operate income-producing properties and generate revenues primarily from rent. Mortgage REITs (mREITs) do not own properties directly; instead, they provide financing for real estate by originating or purchasing mortgages and mortgage-backed securities. Their income is derived from the spread between the interest earned on mortgage assets and their cost of financing. Hybrid REITs combine elements of both equity and mortgage REITs. The National Association of Real Estate Investment Trusts (Nareit) tracks and categorizes U.S. REITs across more than a dozen property sectors, including retail, industrial, office, residential apartments, healthcare, data centers, cell towers, and self-storage.
Publicly traded REITs are listed on major stock exchanges such as the NYSE and NASDAQ and are subject to SEC disclosure requirements, including annual 10-K and quarterly 10-Q filings. Non-traded REITs are registered with the SEC but do not trade on an exchange, limiting liquidity for investors. Private REITs are not registered with the SEC and are available only to accredited investors. The liquid, exchange-traded nature of public REITs means their prices reflect both the underlying value of the real estate assets and broader market sentiment, which can create periods of premium or discount pricing relative to net asset value (NAV).
For tax purposes, REIT dividends received by individual investors are generally taxed as ordinary income rather than at the lower qualified dividend rate, since REIT distributions typically consist of ordinary income passed through from property operations. However, the Tax Cuts and Jobs Act of 2017 introduced a 20% pass-through deduction under IRC Section 199A that allows eligible taxpayers to deduct up to 20% of their REIT dividends, effectively reducing the top federal income tax rate applicable to qualified REIT dividends for many investors.