A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
Why REITs Are Direct for Income
By law (Internal Revenue Code), REITs must distribute at least 90% of their taxable income to shareholders annually. In return, REITs can deduct those dividends from their corporate tax bill, effectively avoiding the "double taxation" of standard corporations.
Key REIT Metrics
Traditional metrics like Net Income or P/E ratios are often misleading for REITs due to high depreciation non-cash expenses. Instead, investors focus on:
- Funds From Operations (FFO): The actual cash generated by the business.
- Adjusted Funds From Operations (AFFO): FFO minus recurring capital expenditures.
- Occupancy Rate: The percentage of properties currently leased.
Tax Treatment
Because REITs do not pay corporate tax, their dividends are typically classified as Ordinary Income rather than Qualified Dividends. This means they are taxed at your standard marginal tax rate, making them ideal for tax-advantaged accounts like IRAs.
DivAgent Educational Standards
This definition is part of the DivAgent Income Academy curriculum. Our glossary is designed to bridge the gap between institutional jargon and retail investor understanding. Each term is reviewed by our Research Team for accuracy, specifically in the context of:
- Tax implications (Ordinary vs. Qualified)
- Impact on Total Return calculations
- Relevance to Option-Income strategies
- Risk assessment in a retirement portfolio
*While we strive for precision, financial terminology can evolve. Always verify definitions with official regulatory sources (SEC, IRS) when making tax or legal decisions.