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What Is a Captive REIT?

CEO Khai Intela
Real estate has always been an attractive investment option, offering potential appreciation, tax advantages, and passive income. However, investing in commercial property can be challenging for individual shareholders. This is where Real Estate Investment Trusts...

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Real estate has always been an attractive investment option, offering potential appreciation, tax advantages, and passive income. However, investing in commercial property can be challenging for individual shareholders. This is where Real Estate Investment Trusts (REITs) come into play, allowing investors to access commercial property without the hassle of direct ownership.

How Do REITs Operate?

REITs first emerged in 1960 and have since become increasingly popular. Some REITs are privately offered but registered with the SEC, while others are publicly traded on securities exchanges. There is also a third type, which is limited to accredited investors due to higher risk and limited disclosures.

One major advantage of the REIT structure is that these trusts operate as pass-through corporations. This means they do not pay federal income taxes as long as they meet specific requirements:

  • At least 75 percent of the REIT's income must come from real estate or related activities.
  • A minimum of 75 percent of the trust's assets must be in real estate.
  • The REIT must distribute at least 90 percent of its taxable income to shareholders.
  • The trust must have at least 100 shareholders.
  • A REIT cannot have more than 50 percent ownership held by five or fewer investors.

Shareholders pay taxes on the income they receive from the REIT, and some may choose to hold their REIT shares in a retirement account for deferred tax recognition.

How Can a REIT Be Captive?

A captive REIT is one that is controlled by a single company, often as a subsidiary. For example, a corporation with a wide range of branch operations might establish a captive REIT within its real estate division. By complying with the REIT rules, the parent company can benefit from tax advantages.

To meet the requirement of having at least 100 investors or shareholders, the parent company may name executives as shareholders of the captive REIT. Additionally, if the parent company pays rent to the REIT subsidiary, which owns the properties, these rent payments may be considered as tax-deductible business expenses.

In return, the REIT subsidiary generates income that it pays to the executive shareholders (effectively to the parent company) as dividends. These dividends are not taxable income for the parent corporation. However, some states have attempted to limit this tactic to preserve their revenue streams.

Can I Invest in a Captive REIT?

While an outsider can indirectly invest by purchasing shares in a corporation that has a captive REIT as a subsidiary, it is unlikely that individual investors would choose such a narrowly focused investment approach.

Please note that this material is for general information and educational purposes only. The information provided is based on data gathered from reliable sources, but it is not guaranteed to be accurate or complete. It should not be used as the primary basis for making investment decisions. All investments carry a certain level of risk, and the value of your investment may fluctuate. There is no guarantee that you will receive any income, and you may receive less than your initial investment.

REITs offer special tax considerations and typically provide high yields and a liquid method of investing in real estate. However, these investments also come with risks, including the absence of a secondary market, difficulties discerning interest payments from principal repayments, and potential fluctuations in the value of underlying real estate.

This article is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.

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