What is the 75 gross income test for REIT?
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.
IRC Section 856(c)(4)(A) requires that at least 75% of the value of a REIT's total assets at the close of each quarter of its tax year consist of real estate assets, cash and cash items (including receivables), and government securities.
The 75-75-90 Rule
A REIT is required to invest 75% of its assets in real estate. Must derive 75% of the gross income from the real estate itself. It can be rental income, mortgages, or the sale of the property. Must pay a minimum of 90% of their taxable income in the form of a shareholder dividend.
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, dividends from other REITs, and gain from the sale or other disposition of real property.
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 ...
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).
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.
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.
| Ticker | Name | 5-Year Return (%) |
|---|---|---|
| CREFX | Cohen & Steers Real Estate Securities F | 4.52 |
| JIREX | JHancock Real Estate Securities 1 | 4.07 |
| IVRSX | VY® CBRE Real Estate S | 4.02 |
| GMJPX | Goldman Sachs Real Estate Securities P | 3.94 |
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.
Can you live off REIT dividends?
It is possible to live off REIT dividends if your investment is large enough. However, you'll need to consider how much income you need and whether the REITs you invest in offer reliable, consistent payouts.
Between dividends and AFFO growth, Realty Income has historically returned 11% a year. At that growth rate, you could become a millionaire with enough time and enough of an initial investment.
Disadvantages of Real Estate Investment Trusts
Limited growth potential: REITs have to distribute at least 90% of their taxable income to shareholders. While this can provide a steady income stream to investors, it also means that REITs can have less capital available for reinvestment and growth.
To qualify as a REIT, an entity must not be “closely held,” meaning, at any time during the last half of the taxable year, more than 50% in value of its outstanding stock cannot be owned, directly or indirectly, by five or fewer individuals (referred to as the “5/50 test”).
The 75-5-10 rule for mutual funds is an investment guideline for diversified mutual funds. Under this rule, such funds must invest 75% of their assets in other issuers' securities and cash, not more than 5% in any one company, and not more than 10% in holding the issuers' outstanding voting shares.
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.
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.
IRC Section 856(c)(3) requires a REIT to derive at least 75% of its gross income from specified sources of real estate source income, including rents from real property.
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.
Are REIT Dividends Taxed Even If Reinvested? Yes, REIT dividends are subject to taxation even if they are reinvested in a taxable account. Most REIT dividends are considered ordinary income, meaning they are usually taxed at the investor's regular income tax rate.
Do all REITs pay monthly dividends?
Most of them distribute dividends on a quarterly basis. There are a few that pay monthly dividends, and even fewer still that are worth owning.
REITs generally don't pay taxes themselves as long as they distribute at least 90% of their income to shareholders.
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.
Daily liquidity: as REITs are publicly traded vehicles, shareholders in REITs can buy and sell shares on a daily basis, with publicly available, transparent pricing.
Real estate companies generally earn reliable streams of income from long and stable tenant leases, and REITs must distribute at least 90 percent of their taxable income to shareholders as dividends.
