Real Estate Investment Trusts (REITS)

By Gregory J. Cook, EA, CPA, Accredited Tax Advisor

REITs are treated as a conduit entity for tax purposes, much like a closed-end fund that invests only in real estate, so long as they pass through 85% of their ordinary income and 95% of their capital gains as dividends to their shareholders.

Equity REITs buy properties directly in the expectation of realizing capital appreciation. Mortgage REITs lend money to developers or real estate owners. Hybrid REITs are a combination of the two.

REIT shares are traded on exchanges much like the stocks of other companies. The ready marketability of REIT shares distinguishes them from most other types of real estate investments.

The current income from a REIT is one of its most attractive features. However, REIT dividends tend to vary widely over time. Very often, debt financing is used in the expectation of increasing return on equity.

A real estate mortgage investment conduit (REMIC) is a conduit entity designed to facilitate the issuance of real estate mortgage-backed securities. A REMIC holds a fixed pool of real estate mortgages and issues a variety of interests in itself collateralized by those mortgages. Corporations, trusts and associations may qualify as REMICs.

A "regular" interest in a REMIC will entitle the owner to the receipt of a specific sum of money. A "residual" interest is any other kind of interest, and will usually resemble an equity interest in which payouts are subject to contingencies.

REMICs are intended to be the only means of issuing multiple-class mortgage-backed securities on a conduit taxation basis. A mortgage pool which fails to meet the REMIC tests is subject to taxation at both the entity and holder levels.