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Trust Law/Level VII · Property and business/7.2 Business/Lesson 4

Real estate investment trusts (REIT)

What makes a company a real estate investment trust under US tax law, how REIT dividends are taxed, and what regulators say about non-traded REITs.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Lowest-cost route: a listed REIT or REIT index fund that can be sold on any trading day; the SEC warns that non-traded REIT upfront fees could reach 15% and shares may be locked up for years.
  2. Hold REIT shares in an IRA or Roth IRA where possible, because most REIT dividends are taxed as ordinary income; 2026 IRA contributions are capped at $7,500, or $8,600 at age 50 and over.
  3. In a taxable account, IRC §199A lets individuals deduct 20% of qualified REIT dividends, now permanent, but not on shares held 45 days or less around the ex-dividend date (Treas. Reg. §1.199A-3(c)(2)(ii)).
  4. Dividends the REIT designates as capital gain dividends are taxed at long-term capital gain rates; the REIT reports each type on Form 1099-DIV, and all of them belong on your return.

MaterialsIRC §§856 and 857 on law.cornell.edu, the main REIT qualification and distribution rulesThe SEC’s Investor Bulletin: Non-traded REITs (2015) on investor.govA Form 1099-DIV from a REIT, if you have one, to see how its dividends are reported

Wonder

  1. Why does a REIT pay little or no corporate income tax?
  2. What does a REIT have to own and earn to keep its status?
  3. Why do regulators warn investors about REITs whose shares do not trade on an exchange?

Explore

  1. The US created the real estate investment trust in the Real Estate Investment Trust Act of 1960, to let ordinary investors own shares in large income-producing real estate much as a mutual fund lets them own securities. The rules are in IRC §§856–860. Despite the name, a REIT need not be a trust: it can be a corporation, trust or association that would otherwise be taxed as a domestic corporation, managed by directors or trustees, with transferable shares or certificates held by at least 100 persons. It becomes a REIT by electing on its tax return, generally Form 1120-REIT.
  2. A REIT must pass asset and income tests. At the end of each quarter, at least 75% of the value of its total assets must be real estate assets, cash and cash items, and government securities. At least 75% of its gross income must come from real estate sources such as rents from real property and interest on mortgages, and at least 95% must come from those sources plus other passive income such as dividends and interest. It also may not be closely held: five or fewer individuals may not own more than half of it in value during the last half of the year.
  3. The central rule is distribution. Under IRC §857, a REIT must distribute at least 90% of its REIT taxable income, computed without the deduction for dividends paid and excluding net capital gain. The REIT deducts the dividends it pays, so income paid out is taxed to shareholders rather than to the REIT. Income it keeps, including retained capital gains, is taxed at the REIT level. Because so much is paid out, REITs often fund growth by issuing new shares or borrowing.
  4. For shareholders, most REIT dividends are ordinary dividends taxed at ordinary income rates rather than at the lower rates for qualified dividends. Dividends the REIT designates as capital gain dividends are taxed as long-term capital gain. Under IRC §199A, individuals may generally deduct 20% of ‘qualified REIT dividends’, meaning REIT dividends that are neither capital gain dividends nor qualified dividend income. That deduction was due to expire after 2025; the One Big Beautiful Bill Act (P.L. 119-21, July 2025) made §199A permanent. The REIT reports each type of dividend on Form 1099-DIV.
  5. Public REITs come in two kinds. Publicly traded REITs are registered with the SEC and listed on an exchange, so shares can usually be sold on any trading day, although the price can swing. Non-traded REITs are also registered and file reports with the SEC but are not listed. The SEC’s 2015 investor bulletin warns that they are illiquid: investors may have to wait until the REIT lists or sells its assets, which might be more than 10 years away, and share redemption programs are typically limited, may be stopped without notice and may pay less than the investor put in.
  6. The same SEC bulletin warns that non-traded REITs typically charge high upfront fees, which it said could reach 15% of the offering price; that distributions may be paid from offering proceeds or borrowing rather than earnings, which reduces the value of the shares; that share values are hard to assess; and that external managers may have conflicts of interest. FINRA notes that non-traded REITs may appraise their assets only about once a year and warns that REIT fraud is real. This lesson explains how REITs work; it does not recommend any REIT or other investment.

Key facts

  • The US created REITs in the Real Estate Investment Trust Act of 1960; the main rules are in IRC §§856–860.
  • At least 75% of a REIT’s assets must be real estate assets, cash and government securities, and at least 75% of its gross income must come from real estate sources.
  • A US REIT must distribute at least 90% of its REIT taxable income, excluding net capital gain.
  • Individuals may generally deduct 20% of qualified REIT dividends under IRC §199A, which P.L. 119-21 made permanent in July 2025.
  • Most REIT dividends are taxed as ordinary income, not at the lower qualified-dividend rates.
  • The SEC warns that non-traded REITs are illiquid, may charge high upfront fees and may pay distributions from offering proceeds or borrowing.

Exercise nine, six, three, one

9CollectList up to 9 facts about a REIT described in this lesson, an SEC or FINRA guide, or a REIT’s annual report you are reading (some lists are shorter), such as what it owns, where its income comes from, how much it distributes, how its shares trade and what it charges.
6ClusterSort them into 6 categories: what it owns, where its income comes from, distributions, tax character of dividends, liquidity and fees, and facts you are unsure about.
3DistillReduce the 6 categories to 3 groups: rules the tax law imposes on every REIT, features that differ between traded and non-traded REITs, and questions you would ask before relying on the information.
1CrystallizeWrite 1 sentence explaining, in your own words, how the 90% distribution rule lets a REIT avoid most corporate-level tax.

Fact check

Dates, figures and claims checked against the published sources listed below.

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