Everybody uses the word REIT, but not many people truly understand what a REIT is, how it came to be.
So what is a REIT?
A REIT is a real estate investment trust that makes investments in real estate. REITs allow investors to buy shares of the property and add the real estate from the trust to their portfolios.
When were REITs created?
The very first REIT was put into place in 1960 by a guy named Tom Berryhill. Berryhill was a relative of a politician and was able to get it to pass in Congress. However, real estate investment trusts were not put into tax law until 1976. The key feature of it was to eliminate the double taxation of a C Corp, But the primary goal of the REIT was to allow average everyday investors who were new to wall street the opportunity to trade real estate like stocks.
In the 1960s-1970’s, the economy was doing great. Investors wanted to access all the capital that the everyday investors had and put something tradable on wall street. This is how the design of the REIT structure was created. Typically, with a C Corp, you pay 35% tax at the corporate level and then distribute dividends to stockholders, then the stockholders have to pay income tax again. Essentially it is double taxation. With REIT’s they avoid double taxation by distributing 90% or more of all the profits to their stockholders. Then the corporation wouldn’t have to pay tax on what the investors would pay. This allowed it to become a single taxation type of vehicle, which everybody thought was good at the time.
Are REITs a good investment now
The problem with REITs is that it strips the true wealth-generating power of commercial realty. The new REIT tax laws have made it so that at the corporate level they void paying 21% but when they distributed to investors, investors are paying taxes on it at a personal level, which very often is a higher tax level than the corporation. This really diminishes the growth potential of the real estate investment and the wealth-generating power that commercial real estate has.