A real estate investment trust, or REIT, is a company that pools money from investors to own or finance income-producing property and then pays most of its profits back out as dividends. Federal law requires a REIT to distribute at least 90% of its taxable income to shareholders each year, and in exchange the company avoids paying corporate income tax on the amounts it pays out.1Office of the Law Revision Counsel. 26 USC 857 – Taxation of Real Estate Investment Trusts and Their Beneficiaries The practical result for you: you can buy a share the same way you buy stock, collect regular dividend income tied to rents or mortgage interest, and never have to buy, finance, or manage a building yourself.
How a REIT Actually Works
Think of a REIT as a mutual fund for real estate. The company raises capital from many shareholders, uses it to acquire apartment complexes, offices, warehouses, shopping centers, or mortgage loans on real property, and then collects rent or interest from those assets. Most of that income has to flow through to you.
The 90% distribution rule is the heart of the arrangement. A REIT that hits the threshold deducts the dividends it pays from its corporate taxable income, so a REIT that distributes all of its taxable income effectively owes zero federal corporate tax. Miss the 90% mark and the whole structure collapses for that year: the company loses its REIT status and gets taxed as an ordinary corporation. That is why REIT dividends tend to be large and consistent. The company doesn’t really have a choice.
Congress placed other guardrails around the structure to keep REITs focused on real estate. At least 75% of a REIT’s assets have to be real estate, cash, or government securities at the end of each quarter, and at least 75% of gross income has to come from real estate sources like rents and mortgage interest.2Office of the Law Revision Counsel. 26 USC 856 – Definition of Real Estate Investment Trust Ownership also has to be broad: after the first taxable year, at least 100 different people must hold shares, and five or fewer individuals cannot own more than half of the outstanding stock during the last half of the tax year.3Office of the Law Revision Counsel. 26 USC 542 – Definition of Personal Holding Company These rules matter to the REIT’s managers more than to you as a shareholder, but they explain why the product looks the way it does.
The Main Types of REITs
Equity REITs
Equity REITs are the most common kind. They own physical properties and collect rent from tenants. A single equity REIT might own hundreds of apartment buildings, office towers, warehouses, or retail centers. Because they hold the deed to real property, these trusts earn both rental income and any long-term appreciation in property values. They are also responsible for maintenance, leasing, and day-to-day operations.
Mortgage REITs
Mortgage REITs, often called mREITs, don’t own buildings. They lend money against real estate or buy mortgage-backed securities, earning the spread between what they pay to borrow and what their loan portfolios yield. The risk profile is very different from an equity REIT. When interest rates rise, the value of existing mortgage-backed securities falls and short-term borrowing gets more expensive at the same time. That squeeze has pushed some mREITs into serious distress during rate spikes.
Hybrid REITs
Hybrid REITs mix property ownership with mortgage lending. They are less common than the pure versions but blend rental income and interest income in one portfolio.
Specialized Sectors
REIT property types now go well beyond the traditional office-and-retail picture. Data center REITs own the facilities that house cloud servers. Cell tower REITs own wireless infrastructure leased to carriers. Others hold self-storage, timberland, hospitals and senior living, single-family rental homes, and casino and gaming properties leased under long-term agreements. What ties them together is that the underlying asset generates recurring rent or lease payments.
How to Buy Shares in a REIT
Publicly Traded REITs
Most individual investors buy publicly traded REITs through a normal brokerage account, exactly like buying stock. Shares trade on national exchanges throughout the day, prices are transparent, and you can sell whenever the market is open. That liquidity is a real advantage over owning a rental property yourself, where selling can take months.
You can also get REIT exposure through mutual funds or exchange-traded funds that hold baskets of REIT shares. A single ETF might spread your money across dozens of REITs in different sectors, which diversifies you without forcing you to pick individual companies.
Public Non-Traded REITs
Public non-traded REITs register with the Securities and Exchange Commission but don’t list on any exchange.4U.S. Securities and Exchange Commission. Investor Bulletin – Real Estate Investment Trusts (REITs) You typically buy them through a financial advisor or broker-dealer during an offering period. Because there is no exchange, you can’t just sell when you want out. Most non-traded REITs run share repurchase programs, but those usually cap redemptions around 2% of net asset value per month or 5% per quarter, and the REIT can suspend the program during financial stress.
Older non-traded REIT offerings carried upfront costs as high as 15% of the investment, so a $100,000 purchase might have put only $85,000 to work in property. Newer structures have brought those costs down, but read the prospectus carefully before committing money you may not be able to get back quickly.
Private Placement REITs
Private REITs are not registered with the SEC and are limited to accredited investors. To qualify, you generally need a net worth above $1 million excluding your primary residence, or individual income above $200,000 in each of the two prior years ($300,000 with a spouse).5U.S. Securities and Exchange Commission. Accredited Investors These offerings have the least liquidity and the least regulatory oversight of the three categories. Without SEC reporting, it can be harder to evaluate the REIT’s financial health or verify asset values.
How REIT Dividends Are Taxed
Because a REIT deducts its dividends before calculating corporate tax, the tax burden lands on you. REIT distributions arrive on Form 1099-DIV split across several boxes, and each piece is taxed differently:
- Ordinary income dividends. The largest portion of most REIT distributions. These are taxed at your regular federal income tax rate, which for 2026 ranges from 10% to 37%. Most REIT dividends do not qualify for the lower rates that apply to qualified dividends from ordinary corporations.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- Capital gain distributions. When a REIT sells a property at a profit, your share of that gain is taxed at long-term capital gains rates, which are lower than ordinary rates for most taxpayers.7Internal Revenue Service. Instructions for Form 1099-DIV
- Return of capital. Part of some REIT distributions is treated as a return of your original investment rather than income. It isn’t taxed right away, but it reduces your cost basis, which increases your taxable gain when you eventually sell the shares.
The 20% Section 199A Deduction
One meaningful break offsets the higher ordinary rates. Under Section 199A, individual taxpayers can deduct up to 20% of qualified REIT dividends from their taxable income.7Internal Revenue Service. Instructions for Form 1099-DIV The deduction originated in the Tax Cuts and Jobs Act of 2017, was scheduled to expire at the end of 2025, and has been extended. Unlike the qualified business income deduction for other pass-through businesses, the REIT version has no wage or capital limitations: if you receive qualified REIT dividends, you can take the deduction regardless of the REIT’s payroll or assets. In practice, a taxpayer in the 37% bracket who claims the full 20% deduction pays an effective rate of about 29.6% on those dividends.
Net Investment Income Tax
Higher-income shareholders owe an additional 3.8% surtax on net investment income, which includes REIT dividends. It applies once your modified adjusted gross income passes $200,000 for single filers or $250,000 for married couples filing jointly.8Internal Revenue Service. Net Investment Income Tax For top earners, that can push the all-in federal rate on ordinary REIT dividends above 33% even after the 199A deduction.
Contributing Property Instead of Buying Shares
If you already own investment real estate with a large unrealized gain, selling it and using the cash to buy REIT shares would trigger a capital gains tax bill. An UPREIT (Umbrella Partnership REIT) offers a workaround. Instead of selling, you contribute the property to the REIT’s operating partnership in exchange for partnership units. Under Section 721 of the Internal Revenue Code, contributing property to a partnership for a partnership interest is generally not a taxable event, so the built-in gain stays deferred until you later convert the units into REIT shares, sell them, or redeem them for cash.9Office of the Law Revision Counsel. 26 USC 721 – Nonrecognition of Gain or Loss on Contribution The trade-off is control. Once the property is contributed, the REIT’s management team makes every operating and disposition decision.
Risks Worth Weighing
REITs get marketed as stable income investments, and the forced payout supports that reputation. Actual risk varies sharply by type.
Equity REITs are exposed to the same forces that hit any property owner: vacancies, falling rents, rising maintenance costs, and declining property values. A retail REIT can suffer when anchor tenants go bankrupt. An office REIT may struggle if remote work permanently reduces demand for commercial space. Diversification across property types and geographies softens the blow but doesn’t eliminate sector downturns.
Mortgage REITs carry concentrated interest rate risk. Their model depends on borrowing cheaply short-term and investing longer-term. When rates rise quickly, borrowing costs jump while the value of existing mortgage holdings drops. Lenders can demand more collateral through margin calls, and if the mREIT can’t meet them, insolvency becomes a real possibility. This is not theoretical; it has happened repeatedly during periods of rate volatility.
Non-traded REITs add liquidity risk on top of whatever property or rate risk the underlying assets carry. If you need your money back and the repurchase program is suspended or capped, you’re stuck. Shares can’t be sold on the open market, and secondary markets that do exist typically price shares well below stated net asset value. Match the type of REIT to the money you’re putting in, and be honest about how soon you might need that money back.