A REIT is a real estate investment trust that owns and finances investment properties, generates income and distributes dividends to investors. Under US income tax law, a REIT can be a corporation, trust fund or association that acts as an investment intermediary in real estate or real estate mortgages (Internal Revenue Code Section 856). However, not all REITs are income tax-deductible, as the term “private REIT” is used for trusts that own unlisted real estate and seek investors to participate.
In particular, a private REIT must qualify as an investment fund or trust fund for its shares to be a qualified investment under the ITA Registered Plan. The type of investor a REIT is seeking will dictate its terms and structure, particularly concerning the desired liquidity of units it is allowed to hold and whether the investor is a registered plan under the Income Tax Act of Canada (ITA). This factor is essential for retail investors. A REIT reduces the risk for individual investors by allowing them to buy securities in income-generating real estate such as offices, hotels, shopping malls and apartments without purchasing the commercial properties themselves.
Investors can build their real estate empire through a Real Estate Investment Trust (REIT). A REIT allows investors to take part in real estate investments that they would not complete on their own and offers a diverse real estate portfolio. In addition, REITs provide individual investors with the opportunity to buy shares in income-generating commercial real estate without having to buy them.
Private REITs provide not the same liquidity but are cheaper to establish, minor subject to regulatory reporting requirements, and not limited by the type of real estate activities they can invest in. As a result, setting up a REIT can help business owners reduce cash flow and attract additional investors to grow the company. REITs cannot invest in fixed-income securities, but investors can share in the benefits of a strong Canadian real estate market if they see the yield as attractive enough to generate a cash return that can be paid monthly or quarterly.
How To Set Up a REIT:
Setting up a private REIT is a great way to raise capital from investors while providing flexibility to manage assets in a way that enables you to increase returns for all. How long it takes to get your REIT listed depends heavily on the capital you can raise from investors at the outset and the size of the real estate portfolio you start with. A REIT must pass two annual income tests and a series of quarterly asset tests to ensure that most REIT income and assets come from real estate sources.
At least 75% of a REIT’s gross annual income must be real estate-related income, such as rent on real estate or interest on a mortgage on a property. In addition, to qualify as a REIT, the company conducting the REIT election must file an income tax return on Form 1120 REIT. As a result, qualified REITs are exempt from the new entity-level set for investment flows that reflect the tax-traded income of trusts and partnerships paid before 1 January 2011.
In 2007, real estate investment trusts (REITs) gained legal status under the Canadian Income Tax Act when the Treasury Department introduced the concept of Special Investment flow-through trusts (SIFTs) and partnerships to protect Canada’s corporate tax base. A crowdfunding sponsor of REITs raises money through a special deal (crowdfunding) in which investors receive a portion of the cash flow from the property sold as an investment. Investors provide the sponsor with capital to buy real estate, and they earn a return on their investment.
In contrast, REIT investors invest in a real estate portfolio. This makes REITs easy for the average investor to ride the Canadian real estate industry that has benefited from massive appreciation in recent decades. In addition, many private Canadian REITS target retail investors in the hope that the assets in the REIT will grow. Finally, because they have uniform returns for unitholders, they will begin to attract institutional investment.
While REITs cannot buy the real estate they want, investors are willing to buy stocks or bonds in them as they grow. Moreover, trading like a REIT provides liquid equities, which means investors can buy and sell REIT shares, for example, just as they invest and sell in retail real estate. In addition, Canadian REIT provides a significant advantage over US investors as distributions are subject to the maximum capital gains tax rate of 15% and not the standard income tax rate for dividends received by UK REIT.
In today’s real estate market, REITs offer the opportunity for long-term business growth and the flexibility to unlock value from static assets. In addition, the availability of tax loopholes such as unit trusts (REITs) and the benefits of viable business concepts such as Sri Lanka have opened up new horizons for entrepreneurs to take the real estate industry to new heights.