A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing real estate assets. To qualify as a REIT under the Internal Revenue Code, the company must: distribute at least 90% of taxable income as dividends to shareholders each year; derive at least 75% of gross income from real estate-related sources; have at least 75% of total assets in real estate, cash, or Treasuries; and have at least 100 shareholders with no five individuals owning more than 50% of shares.
The three main REIT types are equity REITs (own and operate physical properties — the most common), mortgage REITs (mREITs) (invest in mortgages and mortgage-backed securities, sensitive to interest rate spreads), and hybrid REITs (combine equity and mortgage strategies). REITs can be publicly traded (listed on exchanges), public non-traded, or private.
REIT dividends are generally taxed as ordinary income (not at the qualified dividend rate) unless they represent capital gain distributions. However, under the Tax Cuts and Jobs Act of 2017, individual investors may deduct up to 20% of qualified REIT dividends (the Section 199A deduction), effectively reducing the top rate.
REITs provide investors with real estate exposure without the illiquidity and management burden of direct property ownership. Publicly traded REITs offer daily liquidity, which direct real estate does not.
> Exam tip: On the Series 65/66 and CFP, know the 90% distribution requirement (which is why REITs rarely retain earnings) and that most REIT dividends are taxed as ordinary income. Understand the difference between equity REITs (property income/appreciation) and mortgage REITs (interest rate spread income). Non-traded REITs involve significant liquidity risk.