How much income must a REIT pass through?
A REIT generally must distribute (via dividends) at least 90% of its taxable income each year[2] and, unlike most C corporations, receives an income tax deduction for the dividends it pays,[3] thereby achieving modified pass-through status and avoiding double taxation.
In general, a REIT must derive at least 95% of its gross income from certain passive sources and at least 75% of its gross income from certain real estate related sources. Similarly, at least 75% of the value of a REIT's assets must be attributable to certain real estate related assets.
What are the dividend distribution requirements for a REIT? In order to qualify as a REIT, the REIT must distribute at least 90% of its taxable income. To the extent that the REIT retains income, it must pay taxes on such income just like any other corporation.
Invest at least 75% of total assets in real estate, cash, or U.S. Treasurys. Derive at least 75% of gross income from rent, interest on mortgages that finance real estate, or real estate sales. Pay a minimum of 90% of their taxable income to their shareholders through dividends. Be a taxable corporation.
How to Qualify as a REIT? 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.
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.
REIT/PTP Component. This component of the deduction equals 20 percent of qualified REIT dividends and qualified PTP income. This component is not limited by W-2 wages or the UBIA of qualified property.
Income Tests
To fulfill the test requirements, at least 95% of a REIT's gross income must come from sources described in the 75% test and earnings from specific types of portfolio income, such as interest, dividends, and gains from sales of securities.
Companies that derive more than 80 per cent of their assessable income in passive forms will not be able to access the lower company tax rate. The 'passive income' test replaces the 'carry on a business' test as a requirement for access to the lower company tax rate.
Bad REIT Income means (i) the amount of gross income received by the Borrower (directly or indirectly) that would not constitute (A) “rents from real property” as defined in Section 856 of the Internal Revenue Code or (B) interest, dividends, gain from sales or other types of income, in each case, described in Section ...
Which of the following IRS requirements must a trust meet to qualify as a REIT?
To qualify as a REIT, an organization: Must be a corporation, trust, or association. Must be managed by one or more trustees or directors. Must have beneficial ownership (a) evidenced by transferable shares, or by transferable certificates of beneficial interest; and (b) held by 100 or more persons.
The minimum application value will range between Rs. 10,000 – Rs. 15,000.
The 75 percent test: Real estate
The 75 percent gross income test is comprised solely of real estate income. At least 75 percent of a REIT's gross income must be derived from: Rents from real property. Interest on obligations secured by mortgages on real property.
If the REIT fails this closely held test at any time during the last half of any year, it can lose REIT status and cannot elect to be treated as a REIT for five years (IRCазза856(h), 542 and 856(g)). This test does not need to be satisfied in the REIT's first taxable year (IRCаза856(h).
Sensitive interest rates: REITs are highly susceptible to changes in interest rates. When interest rates rise, the cost of borrowing increases for REITs, which can reduce profitability and lead to lower dividend payouts.
A real estate investment trust (REIT) is a company that owns and operates income-producing real estate, allowing investors to gain exposure to the real estate market without directly owning properties. By law, REITs must distribute at least 90% of their taxable income to shareholders.
However, if investors hold their REIT investments for the long term (one year or more), REIT earnings qualify for the lower capital gains rate (no more than 20%). This amplifies the tax benefits for retirees and other investors who hold REITs in retirement accounts.
You can also buy shares in a REIT mutual fund or exchange-traded fund (ETF). To do so, you must open a brokerage account. Or, if your workplace retirement plan offers REIT investments, you might invest with that option. Check with your plan administrator to see what REIT investments are available.
All REIT types do not pay entity-level tax on their earnings if they distribute 100% of their current taxable income to their shareholders. Mortgage REITs have a limited ability to use depreciation because they primarily invest in mortgage loans rather than directly owning physical properties.
- 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.
What is the minimum percentage of distributable income that REITs are required to distribute?
Net Taxable Income of REIT
*A REIT is required to distribute at least 90% of its distributable income.
Even with a challenging market, REITs are considered a staple for many investment portfolios thanks to the 90% rule. As the name implies, this rule stipulates that real estate trusts must distribute 90% of their taxable earnings to existing shareholders.
199A Deduction) The Tax Cuts and Jobs Act (TCJA) created a deduction for households with income from sole proprietorships, partnerships, and S corporations, which allows taxpayers to exclude up to 20 percent of their pass-through business income from federal income tax.
The pass-through status enjoyed by REITs is different from that of other vehicles, and the differences present certain limitations. For example, unlike most other pass-through entities, REITs may not pass through losses to investors.
Bad REIT earnings tend to run afoul of Section 856, which provides that at least 95% of a REIT's gross income must be derived from “rents from real property.” It also provides that at least 75% of its gross income must be derived from that source.
