REIT Status

In order for a corporation to qualify as a REIT it must:

(1) satisfy certain organizational and structural requirements.

(2) satisfy certain income and assets tests.

(3) distribute at least 90% of its real estate investment trust income annually, plus certain other amounts.

(4) not have any pre-REIT earnings and profits.

A domestic corporation that has over 100 shareholders and is not 50% owned by five or fewer individuals will generally satisfy the organizational and structural requirements.

Because the corporation's operations are limited to owning and operating commercial real properties, it will satisfy the assets test. However, if the corporation provides tenants with services other than services that are usually or customarily rendered in connection with the rental of that type of space, the corporation may be required to have those services provided by an independent contractor or by a taxable REIT subsidiary that is established to provide those services.

The requirement that a REIT not have any pre-REIT earnings and profits requires that your real estate corporation makes a substantial dividend distribution to its shareholders to eliminate the pre-REIT earnings and profits. Because qualified dividend income received by individuals is taxed at the 15% capital gain rate, it is likely that this cost could be acceptable to the shareholders.