Key takeaways
- REITs must distribute at least 90% of taxable income to shareholders.
- Evaluate REITs on FFO and AFFO, not net income — depreciation distorts GAAP earnings.
- Non-traded REITs carry liquidity restrictions and higher fee loads.
- REIT dividends are generally taxed as ordinary income, not qualified dividends.
Structure and the 90% rule
A real estate investment trust owns income-producing property or real estate debt and must distribute at least 90% of taxable income to shareholders. In exchange it avoids corporate-level tax. That structure is why REITs are yield vehicles and why they retain little capital for growth, relying on debt and equity issuance instead.
Equity REITs own property and earn rent. Mortgage REITs own real estate debt and earn interest spread, which makes them far more sensitive to rate movements and yield curve shape. They are different investments that share a tax structure.
Reading REIT financials
GAAP net income is nearly useless for REITs because depreciation is a large non-cash charge on assets that often appreciate. Funds from operations adds depreciation back and removes gains on sales. Adjusted FFO further subtracts recurring capital expenditures and straight-line rent adjustments, which makes it the closest thing to distributable cash.
Compare price to FFO across peers the way you would use a P/E ratio, check the payout ratio against AFFO, and examine the debt maturity schedule. A REIT with heavy near-term maturities in a high-rate environment has a refinancing problem regardless of occupancy.
Public, non-traded, and where REITs fit
Publicly traded REITs offer daily liquidity and full disclosure, at the cost of correlating with equity markets in the short run. Non-traded REITs limit redemptions, sometimes gating withdrawals entirely during stress, and typically carry higher fees. Read the redemption terms before, not after.
REITs give diversified, professionally managed, liquid exposure with no operational burden — and no control, no leverage of your choosing, and no depreciation shelter flowing to you. They complement direct ownership rather than replacing it.
Frequently asked questions
How are REIT dividends taxed?
Generally as ordinary income, though a portion may be return of capital or capital gain. Qualified REIT dividends may be eligible for the Section 199A deduction. Holding REITs in tax-advantaged accounts is common.
Are REITs a good inflation hedge?
Partially. Property income tends to rise with inflation, especially with short lease terms, but REITs are also rate-sensitive and often fall when rates rise quickly.
What about real estate crowdfunding platforms?
Most are private placements or non-traded vehicles with limited liquidity and varying disclosure quality. Read the offering documents and understand the sponsor's fee stack and track record.
Sources & further reading
- Nareit REIT industry data and FFO definitions
- SEC Investor Bulletin on non-traded REITs
- IRC §856-859, REIT qualification requirements
Figures and rules change. Verify current requirements with the issuing agency or a licensed professional before acting.