How to Form a REIT

Forming a REIT – a real estate investment trust – lets investors stick their toes into real-estate investing without having to take a crash course in flipping homes. Turning a regular corporation into a REIT is fairly simple, provided your company meets all the requirements.


When you submit your company's tax return, include a form declaring your business a REIT. To qualify, you need at least 100 shareholders and to distribute 90 percent of profits to the owners each year, among other requirements.

Real Estate Investment Trust Companies

Real estate investment trust companies are corporations that make their profits by investing in real estate, the Corporate Finance Institute says. The investment fund is run by shareholders who contribute money to finance real-estate purchases such as office buildings, apartment complexes, warehouses, strip malls, hotels. Some REITs prioritize rental income, some work with mortgages and some blend both options.

Forbes​ says REITs are a good choice for someone who's interested in real estate but isn't ready to invest their money directly. Investing requires plenty of liquidity, enough knowledge for due diligence and a willingness to deal with tenant complaints and other problems. Buying shares in a REIT lets someone invest without relying on their own expertise or gambling too much money. There are other advantages:

  • REIT shares can be bought and sold like any corporate shares.
  • 90 percent of profits go to investors.
  • It's an easy way to diversify an investment portfolio by adding real estate.
  • REITs historically perform well as investments.
  • REITS traded on stock exchanges obey the same reporting rules as other companies, so their finances are transparent.

The drawbacks of forming REIT? For one, giving 90 percent of profits to investors leaves only 10 percent to reinvest. That slows growth. Another is that you pay tax on your share as regular income, rather than the lower tax rate given to dividend income. Some REITs charge high fees, and investors don't have a say in operational decisions. Like any investment, REITs can lose money.

Forming a REIT

Forming a REIT is relatively simple, Morrison & Foerster says. First, you organize your company as a taxable corporation, following the laws of your state. If, say, you organize a corporation this year and wish to become a REIT, submit the 1120-REIT form with the IRS along with your tax return. If you meet the REIT requirements, that's it. A trust, partnership or limited liability company may be able to qualify too.

One of the requirements is that you have 100 shareholders or more, Nareit says. A second is called the 5/50 test. If five people or fewer own more than half the value of the stock during the second half of the tax year, you can't qualify as a REIT.

Financial REIT Requirements

The IRS has financial requirements for REITs too. If you meet them when you file your 1120-REIT and go out of compliance later, the IRS can revoke your REIT status. The 90 percent dividend distribution rule is one such requirement.

Another is that a REIT must earn 75 percent of its income from real estate, such as mortgage interest or rental payments. Another 20 percent can come from real estate or from non-real estate dividends and interest. Five percent can come from investment fees or non-real estate businesses. Fail that test and you're no longer a REIT.

You also have to watch the strict rules on REIT assets. At least 75 percent of REIT assets every quarter must be real estate. The company can't own more than 10 percent of the voting shares in any business but another REIT, and non-REIT stock can't be more than 5 percent of its assets.