unit 11.1 real estate investment trusts (REITS)

REIT can avoid being taxed as a corporation by receiving

75% + of income from real estate and distribute 90% or more of its taxable income to its shareholders

REIT

A company that manages a portfolio of real estate investments in order to earn profits for shareholders

REITS are not

DPPs

equity REITs

Own commercial property they take an ownership position in the properties. they receive rental income and possible capital gains upon a future sale of the properties

mortgage REITs

Own mortgages on commercial property make real estate loans (mortgages) their earnings come from the interest payments on those loans

Benefits of including REITs in portfolio

allow investors the opportunity to invest in real estate w/o incurring the degree of liquidity risk historically associated with real estate bc REITs trade on exchanges and OTC PROPERTIES ARE SELECTED BY PROFESSIONALS WITH GREATER negotiating power than an individual there is a negative correlation to the general stock market bc real estate prices and the stock market frequently move in opposite directions there's a negative correlation to the general stock mkt there is reasonable income and/or capital appreciation

a REIT is a

corporation for US tax purposes the REIT is generally not subject to corporate tax if it distributes to its shareholders substantially all of its taxable income for each year

REITs offer dividends and gains to investor but do not offer

flow-through losses like limited partnership, and therefore are not considered direct participation programs

REITs enjoy a unique

hybrid status for federal income tax purposes a REIT shareholder generally is taxed only on dividends paid by the REIT and on gains upon the disposition of REIT shares

REITs are not

investment companies (MFs)

shareholders receive dividends from ___ income, in most cases those dividends are taxed at ____

investment income taxed at ordinary income rates rather than as qualified dividends if there are capital gains distributions, they are generally taxed at the favorable long term capital gains rate

REIT risks

investor has no direct control over the portfolio and relies on professional management to make all purchase and sale decisions REITs generally have greater p volatility than direct ownership of real estate bc they are influenced by stock mkt conditions if the REIT is not publicly traded, liquidity is very limited. As a result, there is the need for more stringent suitability standards and the regulators give greater scrutiny to trades in unlisted REITs Problem loans in the portfolio could cause income and/or capital to increase

REIT are ___ bc they trade

liquid bc they trade on exchange and OTC

hybrid REITs

own commercial property and own mortgages on commercial property combo of equity and mortgage REITs

REITS do compute NAV

per unit NAV is only an approximation

Dividends from REITs are not

qualified; they are taxed as ordinary

tax related concern for investors, is failure to meet the distribution rules could cause the REIT to be

taxed, adding another level of taxation b4 income gets to investor

REITs are organized as

trusts in which investors buy and sell shares either on stock exchanges or int the OTC market not redeemable as is the case with MFs or UITs but have the liquidity of listed stocks

an owner of a REIT holds an

undivided interest in a pool of real estate investments