Academic journal article Journal of Accountancy

The REIT Stuff

Academic journal article Journal of Accountancy

The REIT Stuff

Article excerpt

Real estate investment trusts (REITs) have made a comeback as investment vehicles, fueled by changes originally made in the Tax Reform Act of 1986.

REITs may be set up as trusts, corporations or associations and must meet several specific and detailed requirements. If these are met, a REIT is treated as a conduit. Income earned can be passed through to the investors and taxed only at the individual investor level. To qualify as a REIT, an organization must satisfy both asset ownership and income requirements.

ASSET OWNERSHIP

Seventy-five percent of the value of the entity's total assets must be in real estate, cash and cash items (such as certificates of deposit or receivables) or government securities. Real estate includes land and buildings, mortgages on real estate, interests in mortgage pools and interests in other qualifying REITs.

In addition, there are limitations on the other 25% of the REIT's assets. The entity may not have more than 5% of the value of its assets in securities, and no more than 10% of the outstanding voting stock, of any one issuer.

A qualified REIT subsidiary is not treated as a separate corporation, and the subsidiary's assets, liabilities, income, deductions and credits are considered to be held by the REIT. To qualify, the REIT must own 100% of the stock of such a subsidiary at all times during its existence. If the REIT does not own all the subsidiary's stock, it is treated as a new corporation that acquired all its assets and liabilities in exchange for the stock.

INCOME

Specified sources also must provide specific percentages of the REIT's annual income.

1. At least 75% of the income must be derived from real estate transactions, gains on other REIT shares, real property tax refunds, gains from foreclosed property, rent from real property, interest on mortgages, gains from the sale or disposition of most real property or real property interests and qualified temporary investment interest. Rent from real property includes that attributable to incidental personal property (as long as it is no more than 15% of the total rent) and includes charges for services customarily furnished in connection with the rental of real property.

Note: If an independent contractor is not used to perform the services or manage the property, the attributable income is not rent from real property. …

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