Real Estate Development Trust
Craig Hullinger
corporation investing in real estate that reduces or eliminates
corporate income taxes. In return, REITs are required to distribute
90% of their income, which may be taxable in the hands of the
investors.
REITs can be publicly or privately held. In order to qualify for the
advantages of being a pass-through entity for U.S. corporate income
tax, a REIT must:
Be structured as corporation, trust, or association
Be managed by a board of directors or trustees
Have transferable shares or transferable certificates of interest
Otherwise be taxable as a domestic corporation
Not be a financial institution or an insurance company
Be jointly owned by 100 persons or more
Have 95 percent of its income derived from dividends, interest, and
property income
Pay dividends of at least 90% of REIT's taxable income
No more than 50% of the shares can be held by five or fewer
individuals during the last half of each taxable year
At least 75% of total investment assets must be in real estate
Derive at least 75% of gross income from rents or mortgage interest
Have no more than 20% of its assets consist of stocks in taxable REIT
subsidiaries.
Trends and Statistics
In recent practice, many REITs distribute all of or even more than
their current earnings, often resulting in dividend yields comparable
to bond yields. If an investment company such as a REIT distributes
more than its taxable income, the excess distribution is considered
"return of capital" for tax purposes (not taxed as ordinary income,
but first reduces basis in REIT stock; if this brings the basis to
zero, then remaining amount of the return on capital is taxed at
capital rates). The distribution requirement may hamper a REIT's
ability to retain earnings and generate growth from internal
resources. This and other restrictions imposed by the Internal Revenue
Code generally limit a REIT's suitability for growth-oriented
investors. However, other considerations may result in potential for
stock price appreciation, such as improvements in the REITs underlying
leasing markets, changes in interest rates or increasing demand for
REIT stocks.
As of early 2005 there were nearly 200 publicly traded REITs operating
in the United States. Their assets included a combined $500 billion,
and approximately two-thirds of them were trading on national stock
exchanges. The number of REITs not registered with the Securities
Exchange Commission and not publicly traded is about 800.
Excerpted from Wikapedia