Glossary · Fund / vehicle structure
Real Estate Investment Trust (REIT)
This entry covers the US federal tax definition (IRC sections 856-857). Many other countries have REIT regimes with their own ownership, asset, income and distribution rules.
A real estate investment trust (REIT) is a corporation, trust or association that elects REIT status under US federal tax law and meets ownership, income, asset and distribution tests, which lets it deduct the dividends it pays.
A REIT is a company that owns or finances income-producing real estate and pays most of its taxable income to shareholders as dividends. In exchange for strict rules on what it owns, how it earns its income and how widely its shares are held, it pays little or no corporate income tax on the income it distributes. Its shares may be listed on an exchange, registered with the Securities and Exchange Commission (SEC) but not listed, or held privately.
Formal definition
Internal Revenue Code (IRC) section 856(a) defines a REIT as a corporation, trust or association (1) managed by one or more trustees or directors; (2) whose beneficial ownership is evidenced by transferable shares or certificates of beneficial interest; (3) that would be taxable as a domestic corporation but for the REIT provisions; (4) that is neither a financial institution referred to in section 582(c)(2) nor an insurance company subject to subchapter L; (5) whose beneficial ownership is held by 100 or more persons; (6) that is not closely held under section 856(h); and (7) that meets the election, income and asset requirements of section 856(c). Section 857 adds the distribution requirement and the tax treatment.
Jurisdiction and status
This entry states the US federal tax regime in IRC sections 856 and 857 as it applies to tax years beginning in 2026. The limit on holdings of taxable REIT subsidiary (TRS) securities has changed over time. It was 25% for taxable years beginning after 30 July 2008 and no later than 31 December 2017, and 20% for later years through 2025, as the 2025 Internal Revenue Service (IRS) instructions for Form 1120-REIT state. Public Law 119-21, enacted on 4 July 2025, restored 25% for taxable years beginning after 31 December 2025 (section 70439). Older summaries quoting 20% are out of date for 2026 and later tax years. A TRS is a corporation, other than a REIT, in which the REIT owns stock and which the REIT and the corporation jointly elect to treat as a TRS (section 856(l)(1); Form 8875). A 100% tax applies to redetermined rents, redetermined deductions, excess interest and redetermined TRS service income (section 857(b)(7)(A)), broadly amounts by which dealings involving the REIT and its TRS depart from arm's-length terms.
Ownership and organisation tests
The 100-holder requirement must be met on at least 335 days of a 12-month taxable year (section 856(b)). A REIT is closely held if the stock ownership condition of section 542(a)(2) is met: broadly, if at any time during the last half of the taxable year more than half of its stock by value is owned, directly or indirectly, by five or fewer individuals (section 856(h)). Neither test applies in the first year for which the REIT election is made (section 856(h)(2)). The entity must elect REIT status on its return (section 856(c)(1)), and the IRS instructions add that it must use a calendar tax year unless it first qualified before 5 October 1976.
Income tests
- 75% test (section 856(c)(3)): at least 75% of gross income must come from real estate sources, including rents from real property, interest on obligations secured by real property, gains on real property and dividends from other REITs.
- 95% test (section 856(c)(2)): at least 95% of gross income, excluding prohibited-transaction income, must come from a wider list that adds dividends and interest from any source, and gains on stock and securities not held primarily for sale to customers, to the real estate sources above.
Rents only qualify as rents from real property within limits. Impermissible tenant service income is never rents from real property (section 856(d)(2)(C)), and if it exceeds 1% of all amounts received or accrued with respect to a property, all of those amounts, including the rent, are treated as impermissible tenant service income (section 856(d)(7)(B)). Services that would breach these limits are usually provided through independent contractors or a taxable REIT subsidiary (TRS).
Asset tests
Tested at the close of each quarter under section 856(c)(4):
- at least 75% of total assets by value in real estate assets, cash and cash items (including receivables) and government securities;
- no more than 25% in securities other than those counted in the 75% basket;
- no more than 25% in securities of one or more TRSs, for taxable years beginning after 31 December 2025;
- no more than 25% in nonqualified publicly offered REIT debt instruments;
- outside the 75% basket and TRSs, no more than 5% of total assets in one issuer's securities, and no more than 10% of one issuer's voting power or of the value of its outstanding securities.
Distribution requirement and REIT taxation
A REIT qualifies only if its deduction for dividends paid, determined without regard to capital gain dividends, is at least 90% of its REIT taxable income, computed before that deduction and excluding net capital gain, plus 90% of its after-tax net income from foreclosure property, less any excess noncash income (section 857(a)(1)). The REIT is taxed at corporate rates on REIT taxable income after the dividends-paid deduction (section 857(b)(1)-(2)), so income it retains is taxed. A separate 4% excise tax under section 4981 applies to the amount by which distributions for a calendar year fall short of a required distribution, broadly 85% of ordinary income plus 95% of capital gain net income (section 4981(a)-(b)), and is reported on Form 8612. Net income from prohibited transactions, meaning sales or other dispositions of property described in section 1221(a)(1) (broadly, inventory and property held primarily for sale to customers in the ordinary course of business) that is not foreclosure property, is taxed at 100% (section 857(b)(6)(A)-(B)), subject to statutory safe harbors (section 857(b)(6)(C)-(D)). Capital gain dividends are treated by shareholders as long-term capital gain (section 857(b)(3)).
Types of REIT
By assets: equity REITs own and operate income-producing property; mortgage REITs lend directly or buy mortgage-backed securities and tend to use more leverage; hybrid REITs do both. By market: listed REITs file reports with the SEC and trade on an exchange; non-traded REITs also file with the SEC but are not listed, so liquidity depends on limited redemption programmes that the company can discontinue; private REITs are neither listed nor registered for public sale. Mortgage REITs commonly rely on an exclusion from the definition of investment company in the Investment Company Act, section 3(c)(5)(C), which covers issuers that are not engaged in the business of issuing redeemable securities (or face-amount or periodic payment plan certificates) and are primarily engaged in purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.
REITs inside private funds
Private real estate funds sometimes hold US property through a private REIT that the fund controls. Dividends, including REIT dividends, are generally excluded from UBTI by section 512(b)(1); that exclusion does not apply to income from the investor's own debt-financed property (sections 512(b)(4) and 514), and section 856(h)(3) has special rules for qualified pension trusts that hold REIT shares. A private REIT still needs 100 holders after its first year; in practice this is often met with a small class of preferred shares issued to many holders. A REIT is not a pass-through entity: it cannot pass tax losses to its shareholders, unlike a partnership or master limited partnership.
How investors analyse REITs
Analysts of listed REITs use funds from operations rather than net income, because depreciation of real estate under accounting rules is a large non-cash charge, and compare share prices with an estimate of the net asset value of the property portfolio. Property-level analysis uses NOI, including same-store NOI, and cap rates. For non-traded REITs, the SEC's Office of Investor Education and Advocacy has warned (Investor Bulletin, December 2011) that they frequently pay distributions in excess of their funds from operations and may use offering proceeds and borrowings to do so.
Worked example
Illustrative minimum dividends-paid deduction
A REIT's taxable income before the dividends-paid deduction is $100m, of which $20m is net capital gain. It has no foreclosure property and no excess noncash income. The section 857(a)(1) floor is 90% × ($100m − $20m) = $72m of dividends paid. If it pays exactly $72m, none of it designated as capital gain dividends (which do not count toward the floor), it keeps its REIT status but pays corporate tax on the $28m it retains, and the section 4981 excise tax may also apply. REITs commonly distribute more than the minimum for this reason.
Examples are illustrative; figures are not market data.
Not the same as
- Non-Traded REIT: A non-traded REIT is a REIT that is registered with the SEC but not listed on an exchange; it is a subset with different liquidity and fee characteristics.
- Real Estate Private Equity (REPE): Real estate private equity (REPE) funds are private, fixed-life limited partnerships; a REIT is a perpetual tax-qualified company, although REPE funds may hold assets through private REITs.
- Master Limited Partnership: A master limited partnership (MLP) is a publicly traded partnership whose income and losses pass through to unitholders; a REIT is a corporation for tax purposes that deducts dividends and cannot pass losses through.
- Open-End Fund: An open-end real estate fund is a vehicle defined by its subscription and redemption terms, usually a partnership; REIT is a tax status that can apply to listed, non-traded or private companies.
How it is classified
- Treat an entity as a US REIT only if it has made, and not lost, the section 856(c)(1) election; a fund that owns a private REIT is not itself a REIT.
- Classify by assets (equity, mortgage, hybrid) and separately by market (listed, non-traded, private); the two dimensions are independent.
- For non-US vehicles, use the name of the national regime and its own statute, not the US tests.
Common mistakes
- Saying a REIT must distribute 90% of its income. The test is a dividends-paid deduction of at least 90% of REIT taxable income excluding net capital gain, with adjustments; retained income is taxed.
- Quoting the 20% TRS limit as current. It is 25% for taxable years beginning after 31 December 2025.
- Describing a REIT as a pass-through entity. It is a corporation for tax purposes that deducts dividends; losses stay in the REIT.
- Applying US REIT thresholds to REIT regimes in other countries.
- Treating a non-traded REIT's distribution rate as income return without checking how distributions are funded.
Edge cases
- In its first REIT year an entity need not meet the 100-holder or closely-held tests.
- Property acquired through foreclosure can be elected as foreclosure property, with its income taxed separately rather than failing the income tests.
- Selling property held primarily for sale to customers triggers the 100% prohibited-transactions tax unless a statutory safe harbor applies, which limits REIT development-for-sale activity.
Questions
Do REITs pay corporate income tax?
On income they distribute, effectively not, because they deduct dividends paid. They pay corporate tax on income they retain, and taxable REIT subsidiaries pay tax on their own income.
What is a private REIT?
A REIT whose shares are neither listed nor registered for public sale. Private real estate funds often use one to hold US property; it must still meet every REIT test, including 100 holders after its first year.
What is the current taxable REIT subsidiary limit?
25% of the value of total assets for taxable years beginning after 31 December 2025, restored by Public Law 119-21. It was 20% for taxable years beginning in 2018 through 2025.
External standards
| Standard | Relation | Note |
|---|---|---|
| Internal Revenue Code (US) (26 U.S.C. 856-857) | equivalent | The legal definition and tests. |
| SEC Standard Industrial Classification (SIC 6798 Real Estate Investment Trusts) | related | EDGAR industry code used for REIT filers. |
Sources
- 26 U.S.C. 856 - Definition of real estate investment trust. U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 856(a)-(e), (h)(1)-(3), (l)(1) — supports: Definition; 100 holders for 335 days; closely held via sec. 542(a)(2); first-year relief; income tests; quarterly asset tests incl. 25% TRS limit; impermissible tenant service income (d)(2)(C) and the 1% rule (d)(7)(B); foreclosure property; pension-trust rules (h)(3); TRS definition and joint election (l)(1)
- 26 U.S.C. 857 - Taxation of real estate investment trusts and their beneficiaries. U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 857(a)(1), (b)(1)-(4), (b)(6)(A)-(D), (b)(7)(A) — supports: Distribution requirement; tax on REIT taxable income; capital gain dividends; foreclosure property tax; 100% prohibited-transactions tax, definition and safe harbors; 100% tax on redetermined rents, deductions, excess interest and TRS service income
- Public Law 119-21 (H.R. 1, 119th Congress), sec. 70439 - Restoration of taxable REIT subsidiary asset test. U.S. Congress (congress.gov; official slip law, 139 Stat.), Enacted 2025-07-04. Status: in force (checked 2026-10-01). Sec. 70439(a)-(b) — supports: TRS limit restored from 20% to 25% for taxable years beginning after 31 December 2025; enacted 4 July 2025
- Instructions for Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts (2025). Internal Revenue Service, 2025 instructions (for tax returns filed in 2026). Status: current (checked 2026-10-01). Who Must File; Taxable REIT Subsidiaries; Other Forms (Form 8612); Part IV — supports: Calendar-year requirement; TRS limit history (25% 2008-2017, 20% thereafter through 2025); Form 8875; 4% excise tax; prohibited transactions
- Investor Bulletin: Real Estate Investment Trusts (REITs). U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy, December 2011. Status: published; not updated since 2011 (checked 2026-10-01). Three Categories of REITs; Comparison of Publicly Traded and Non-Traded REITs (redemption programs may be discontinued; distributions in excess of FFO from offering proceeds and borrowings); Special Tax Considerations (not a pass-through) — supports: Equity, mortgage and hybrid REITs; listed vs non-traded; distribution funding warning; REITs cannot pass losses through
- What is a REIT? / How to Form a REIT. Nareit, Web pages accessed 2026-10-01. Status: Current (checked 2026-10-01). What is a REIT; How to Form a REIT — supports: Public listed, public non-listed and private REITs
- 26 U.S.C. 512 - Unrelated business taxable income. U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 512(b)(1), (b)(4) — supports: Dividends excluded from UBTI; debt-financed property income included notwithstanding (b)(1)
- 15 U.S.C. 80a-3 - Definition of investment company (Investment Company Act sec. 3, incl. 3(c)(1) and 3(c)(7)). U.S. Congress (United States Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 3(c)(5) opening words and (C) — supports: Real-estate exclusion relied on by mortgage REITs, with its no-redeemable-securities condition
- 26 U.S.C. 4981 - Excise tax on undistributed income of real estate investment trusts. U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-02). Status: in force (checked 2026-10-02). Sec. 4981(a), (b)(1) — supports: 4% excise tax on the shortfall of distributions below the required distribution (85% ordinary income + 95% capital gain net income)
- 26 U.S.C. 542 - Definition of personal holding company (incl. sec. 542(a)(2) stock ownership requirement). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-02). Status: in force (checked 2026-10-02). Sec. 542(a)(2) — supports: Stock ownership requirement used by sec. 856(h) closely-held test