Real Estate Investment Trusts (REITs) are a growing category of investment vehicle in the US, with over $1.3 trillion in assets under management.
They offer the flexibility to manage the real estate portfolio, but there are also some important considerations when setting up a REIT, including the tax ramifications of buying and holding real estate.
Here are the basics of real estate investment trusts (REITS) and the tax implications of investing in them.
What are REITs?
REIT stands for Real Estate Institutional Trust.
The term “REIT” is often used to describe a company that owns real estate and manages it, or a group of real-estate companies that share a common interest in real estate management.
The REIT concept originated with the creation of a national real estate market in the early 20th century.
In the early years, REIT firms were often referred to as “trusts” in reference to the fact that their investments would not be subject to taxation under current tax laws.
However, in the late 1990s, Congress enacted the Tax Reform Act of 1986 (TRA 1986), which created a new tax code that made it a tax-free activity for individuals to make investment decisions on real estate (known as Section 8).
Section 8 applies to investment decisions made by individuals, not businesses, and the real-world impacts of the legislation can be significant.
The Tax Reform act has given rise to a number of REIT companies, such as REIT Capital, REVREIT, and REV REIT.
REIT investors are allowed to make tax-deductible investment decisions, including property sales and real estate investments.
The tax-advantaged investments made by REITS can include property or real estate, real estate or property-related investments, and real-property loans.
The type of real property or property investment REIT makes is a critical distinction.
Generally, REITS are considered to be investments in real-space.
Property is typically defined as land, real- or personal-use buildings or structures, real or personal vehicles, real property rights or other similar types of real assets.
Real estate and property rights are defined as property that has the legal rights to be used and sold as a place of residence, and other properties that have such rights.
Property-related investment REITS also include other real estate assets, such a land parcel, real assets that have a right to be part of a residential development or other real property.
Real-property investment REPs also include certain types of assets, including real estate rights, property that is a rental property or leasehold property, and similar types.
REPs are generally tax-exempt because they are investments in the real property of real individuals, rather than real businesses.
Some REPs may have a significant impact on a business.
Some real estate REPs invest in real property, such that the investment is a part of the business’s portfolio and not subject to tax.
In this way, the REP may be subject not just to taxes on capital gains or loss from the sale of real properties, but also to taxes associated with the sale and use of other assets.
REP investors may also pay a tax on the value of their investments when they sell or transfer real property to other entities, such the sale or transfer of real real estate to a REP.
Tax implications for REPs Real estate investment REPs typically pay tax on their investments, but it depends on the type of REP they are.
REPPs that are primarily real estate invest in property or land assets, rather that real-business real estate holdings.
REVPs are real-life REPs that invest in non-real-property real-time and/or property assets.
They are also tax-qualified because they make real estate investing decisions based on real-asset prices and other factors that may include market values and other financial data.
RETPs typically invest in an amount of real time or property (typically a percentage of the property value) and not real-person property (such as real estate).
Real-time investments in property are tax-preferred because the real price of property is subject to the same tax rules as real-real property.
Property, real land, and property-based real estate are also taxed differently.
RETS and REVP investments may pay more in taxes than other types of REPs, such REPs investing in property and property related investments.
Real property REPs generally pay less in taxes when they invest in their real property than they do when they use their property or other assets to buy real estate in the form of a REPT or a REV.
Property and real property investments are generally taxed differently because real-house real estate is subject the same property taxes as real property and real properties are subject different property taxes.
Real land REPs often pay lower taxes than RE