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An REIT is a company dedicated to owning and, in most cases, operating income-producing real estate, such as apartments, shopping centers, offices and warehouses. Some REITs also are engaged in financing real estate. Most importantly, to be a REIT a company is legally required to pay virtually all of its taxable income (90 percent) to its shareholders every year.
An REIT may deduct the dividends paid to the shareholders from its corporate tax
bill so long as —
- the company's assets are primarily composed of real estate held for the long
term,
- the company's income is mainly derived from real estate, and
- the company pays out at least 90 percent of its taxable income to
shareholders.
The main benefit of being a REIT: one level
of taxation.
The main limitation of being a REIT: a restriction on earnings
retained by the company.
For a REIT to grow, capital must come from money raised in the
investment marketplace as well as money generated internally. REITs, like other
stocks, are carefully monitored by others, including the SEC, each REIT's
independent directors, independent auditors, and the business and financial
media.
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