What is a Real Estate Trust?

Real Estate Trusts are organizations that are formed so that real estate investors can benefit from the diversification and special income tax benefits that are available to mutual funds and other regulated investment companies.

Regular corporations are subject to what is known as double taxation. This is when the income of the corporation is subject to tax, and then the leftovers are distributed to the stockholders in the form of dividends. These dividends are then subject to taxation on each individual stockholders personal income tax. At the end of the day, every dollar that is generated by the corporation is taxed twice.

Mutual funds and Real Estate Trusts on the other hand are what are known as investment conduits. These conduits are only subject to tax at the investor, or stockholder level. There are three types of Real Estate Trusts; Real Estate Investment Trusts (REIT’s), Real Estate Mortgage Trusts (REMT’s), and trusts that represent a combination of both equity and debt.

The basic requirements of a Real Estate Trust are;

• The trust cannot hold property specifically for the purpose of selling it to customers in the ordinary course of business

• The trust cannot have fewer than five people who own more than fifty percent (50%) of the beneficial interest in the trust

• There must be a minimum of 100 investors that own shares in the Real Estate Trust

• The interests in the Real Estate Trust must be evidenced by shares that are transferable, or certificates of investment

• A minimum of ninety-five percent (95%) of the Real Estate Trust’s gross income must be derived from its investments.

• A minimum of seventy-five percent (75%) of the Real Estate Trust’s gross income must be derived from real estate investments

• No more than thirty percent (30%) of the Real Estate Trust’s gross income can be a result from sales of stock and other securities held for a period of less than one year, or from the sale of real estate held for less than four years.

• Ninety-five percent (95%) of the Real Estate Trust’s gross income must be distributed in the year that it is earned

• All of the income of the Real Estate Trust must be considered passive income by the IRS.

Real Estate Investment Trusts (REIT's) are equity funds that invest in commercial real estate. These investments include office buildings, retail stores, shopping centers, apartment buildings, industrial parks, storage centers, etc. REIT's offer diversification for small investors that could otherwise not be able to invest in large stabilized commercial real estate. REIT's generate income from the rents that tenants pay for renting space in the assets that the REIT's own. Real Estate Investment Trusts also generate income from the capital appreciation and sale of their real estate assets. These rents and gains are paid out to the investors.

Real Estate Mortgage Trusts (REMT's) are funds that make mortgage loans on commercial real estate. Some of these loans are actually for commercial real estate owned by Real Estate Investment Trusts. REMT's generate income from the interest that is earned on the mortgages that they create. They also generate income from loan origination fees, and profits earned in the secondary mortgage market.