How do REITs work?

Reits or real estate investment trusts were created by congress in 1960 to give all Americans the opportunites to benefit from investing in income-producing real estate, REITs allow anyone to own or finance properties in the same way shareholders benefit by owning stocks and other corporations, the stockholders of a REITs earn a share of the income produced through real estate investment without actually having to go out and buy or finance property, this video provides some insight into what REITs are and how they work.

The REITs industry has a diverse profile which offers many benefits, REITs often are classified in one of two categories, equity REITs or Mortgage REITs.

Euqity REITs owned a wide range of property type including offices, shopping centers, hotels, apartments, and much more, equity REITs derive most of their revenue from rent on those properties, mortgage REITs may finance both residential and commercial properties, mortgage REITs get most of their revenue from interest earned on their investment in mortgage or mortgage-backed securities, in addition REITs may be pubicly registered with SEC and have their share listed and traded on major stock exchanges or they may be publicly registered with SEC but not have their shares listed or traded on major stock exchanges or they maybe private companies, not registered with the SEC and not listed or traded on a stock exchange, regardless of the type, REITs operate under specific set of rules, established by Congress.

A REITs is an entity that is modeled after mutual fund is treated by the internal Revenue Code as a corporation, must be widely held by shareholders, must primarily own or finance real estate, and must own its real estate with a long-term investment horizon.

The IRS implements the REIT rules and oversee what qualifies as a REITs, the internal Revenue Code requires a REIT to adhere to the following essential rules, at least 75% of the corporations income must be earned from real estate as rent, real estate interest, or from the sales of real estate assets, at least 75% the corporations assets must be real estate assets at least 95% of income must be passive.

REITs are required to distribute at least 90% of taxable income annually to shareholders as taxable dividends, in other words, a REITs can not retain it is earnings, like a mutual fund a REITs receives dividends paid deduction so no tax is paid at the entity level if, 100% of income is distributed, REITs shareholders pay taxes on dividends at ordinary rates versus the lower qualified rate, the top ordinary rate is now 39.6% over time REITs and the rules and regulation that govern them have evolved to meet the changing needs of the real estate industry and the broader economy, but throughout that process, REITs have remained true to the mission laid out by Congress in 1960 to make the benefits of income-producing real estate accessible to anyone and everyone and that’s still how they work today.

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