What is Real Estate Investment Trust?
Real Estate Investment Trust abbreviated as REIT is a form of a business or a trust which operates in owning, investing or spending in real estate or properties related to real estate. The trust is very advantageous to investors. It enables multiple taxpayers to pool in their possessions and purchasing shares in REIT which itself owns a valuable property. REIT helps its shareholders in acquiring, possessing and managing the commercial territories for the profit.
REIT is usually used in corporate structures for holding on to vast portfolios of investment properties.
IMPORTANT NOTE: A particular treatment is given to REIT form of 1031 Exchange because 90 percent of the taxable income of investors are paid as dividends to the shareholders. Also, 75 percent of the gross income must be received from the property holding of REIT.
What is the average number of investors in Real Estate Investment Trust (REIT)?
The number of investors in Real Estate Investment Trust keeps on varying. REITs have right to own portfolios of institutional properties worth millions and billions of dollars (beginning from 100 Million). REIT has various advantages which fetch more and more investors due to its professional management, diversification, potential liquidity and transparency of financial records (you can find REITs audited annual reports published on the website).
IMPORTANT NOTE: It is frequently found REITs to be listed and traded on stock exchanges only, but there are other REITs as well. These REITs are non-traded and private in nature.
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What are the advantages gained by investors from using the Real Estate Investment Trust (REIT) 1031 Exchange?
The most significant advantage of the Real Estate Investment Trust (REIT) 1031 Exchange is its shared loss managing capability. There are a vast number of properties owned by REITs which offers investors with a stable monthly income in the form of rents coming from the underlying assets. It is on the investor to bear the gains and losses incurred by the property which is divided and shared under REIT. Since the profit and failure both are shared, the fund is distributed depending upon the separate equities which help in minimizing the effects of loss and unaffecting the shared gains.
What makes REIT a diversified form of 1031 Exchange?
The diversification of REIT 1031 Exchange means multiple properties are located in the multiple parts of the country or it can be in the world as well when it comes to the Global REITs. It includes having many tenants owning various types of investment properties such as warehouses, residential apartments, offices and many more.
IMPORTANT FAQs ABOUT REIT
When real property is exchanged for real estate, it is considered as a Like-Kind Property. Under REIT, every property owned by an investor is deemed to be personal property. Hence, it is not viewed as a Like-Kind Property. A Like-Kind Property has to be original and should be exchanged with a property of the same nature and character; it doesn’t matter if they vary in quality and grade.
According to IRS, REIT is not considered as a “like-kind” for 1031 exchange purposes. In such cases, the investor can opt for “UpREIT” transaction (also known as 721 Exchange).
The Section 721 of the Internal Revenue Code states that every investor is allowed to defer from Capital Gains Taxes even if they are trading their property to REIT in exchange for operating partnership units, which can be directly exchanged for shares of the REIT. However, it is uncommon for large REITs to form single-asset acquisitions. This is done to limit the investor’s ability to perform Section 721 Exchange which is directly dependant on the quality and the size of real estate owned by the investor.
In such conditions, investors can sell their investment property and derive a more institutional asset or portfolio of assets which can be structured as TIC or DST. The TIC or DST can be sold upon disposition which provided investors with an ability to exchange their interests for operating REIT shares via 721 Exchange.
How beneficial is investing in REIT form of 1031 Exchange?
REIT offers multiple advantages mentioned below:
- Commercialized Real-Estate Investment
- Investment in a publicly traded stock
- The longer rate of returns
- Stable Income
- Enhanced Investment Performance
- Property Diversification
- User-Friendly Business Model
- Investment in not Like-Kind Property
- Active Exit clause for unlike DST
- Easy Property Management
- Appreciation to Investors
- Easy returns in the form of Dividends
- Lower Volatility and Correlation
What are the risks eliminated from using REIT form of 1031 Exchange?
No property exchange is risk-friendly in nature. Even in REIT form of 1031 Exchange, there is a certain amount of risk visible which is lower in intensity when it is compared with Equity Stock Exchanges. However, the risk is minimized since the loss is shared. Some of the dangers eliminated by REIT are given below.
What can you do as an investor of a REIT?
A REIT is a group of properties and assets of the investors. As a member of REIT, an investor is, directly and indirectly, responsible for multiple things, such as the following:
- An investor is not responsible for managing real estate.
- Any individual investor isn’t accountable for operating authority, control or decisions.
- The investors have limited liability for the real estate since there is no deeded title given to a real estate.
- All the investors under REIT receive a fair and equal amount of income from the funds generated from REIT.
- No investor is required to disclose any personal information to attain validation from another investor in REIT.