Personal Finance: How to be a landlord without the hassle - Chattanooga Times Free Press
By Google News Personal Finance ·
By Chris Hopkins November 7, 2026 5 min read
A real estate investment trust, or REIT, is a unique corporate structure that is designed to own or operate income-producing real estate or hold real estate-related debt. Congress created the structure in 1960 so individual investors could gain exposure to commercial properties by investing in companies specifically designed to manage real estate.
The concept is similar to mutual funds and ETFs that provide ordinary investors with access to a portfolio of stocks and bonds. REITs operateunder different tax rules that make them attractive to income-oriented investors but also may complicate matters at tax time.
To qualify as a real estate investment trust, a company must invest at least 75% of its assets in real property, cash or Treasuries, and derive at least 75% of its gross income from rents, mortgage interest, or property sales. It must also have at least 100 shareholders and be governed by a board of directors or trustees.
Most importantly, it must pay out at least 90% of its taxable income to shareholders each year. If it meets these requirements, a REIT can avoid taxation at the corporate level, passing through its net income to holders of stock in the company.
This differs fundamentally from most public companies, which pay income tax on their earnings, then distribute a portion of net profits as dividends to shareholders that are taxed a second time at the individual level. Avoiding double taxation can mean higher cash payments to shareholders who understand and appreciate the risks and tax implications.
Before 1960, investing in commercial real estate was largely the domain of wealthy individuals, family partnerships, insurance companies and pension funds. Early real estate trusts had enjoyed favorable tax treatment in the late nineteenth and early twentieth centuries, but changes in federal tax law during the 1930s subjected many of these entities to corporate taxation.
This effectively eliminated much of the tax advantage that had made the structure attractive.
Although the real estate industry subsequently sought legislation that would restore pass-through tax treatment, President Dwight D. Eisenhower vetoed the first significant REIT bill in 1956, expressing concern over potential loss of federal tax revenue. Four years later, Ike had gotten on board and signed a bill creating the modern real estate investment trust structure.
Characteristically, Congress buried the REIT provisions deep within the Cigar Excise Tax Extension Act of 1960. Today, there are around 200 publicly traded REITs valued at over $2.5 trillion. The S&P 500 index holds 28 real estate trusts.
There are two broad classes of real estate trusts. Equity REITs own physical property and collect rent. They make up the bulk of the market and span many sectors including residential apartments and rental homes, industrial warehouses and logistics centers, healthcare facilities, retail shopping centers and office properties. Specialty segments have expanded in recent years including cell towers and data centers.
With most equity REITs, depreciation is a significant income statement expense that reduces earnings but is not a cash expense. Therefore, reported earnings understate free cash flow. Analysts therefore favor “funds from operations,” or FFO, which adds depreciation back and strips out property sale gains to better approximate cash available to distribute to shareholders. This metric is especially important…
Originally published by Google News Personal Finance
