Real Estate Investment Trusts (REITs)
Chapters in this video
- 0:00 REITs versus 1940 Act investment companies
- 1:29 The three liquidity flavors and the non-traded trap
- 2:46 The IRS obstacle course: 75%, 95%, and 90% rules
- 4:38 Landlords versus lenders: equity, mortgage, and hybrid REITs
- 6:25 Ordinary income taxation and return of capital basis reduction
- 7:34 Rapid-fire exam recap
What this video covers
- Why a REIT is governed by the Internal Revenue Code (IRC) and is explicitly exempt from the Investment Company Act of 1940, despite pooling investor capital and issuing shares
- The liquidity spectrum across publicly traded, non-traded, and private REITs, and why SEC registration does not equal exchange trading or liquidity
- The 75% asset test, 75% income test, 95% income test, 90% distribution rule, 100 shareholder rule, and 5/50 rule, and why failing any single test means complete loss of REIT status
- Why the 90% distribution rule creates a dividends-paid deduction at the corporate level but does not make distributions tax-free to shareholders
- The distinction between equity REITs (landlords collecting rent), mortgage REITs (lenders collecting interest), and hybrid REITs, and why mortgage REITs carry the most interest rate risk
- Why ordinary REIT dividends are taxed as ordinary income and do not qualify for the lower qualified dividend rate
- How return of capital distributions reduce shareholder cost basis and create deferred capital gains tax, rather than immediate ordinary income
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