The Benefits of Establishing a Private REIT

In the real estate industry, the lifeblood of any investment project is capital. That’s why it’s important for investment funds to be able to stand out to their potential investor pool.

Private Real Estate Investment Trusts (REITs) offer a powerful, often overlooked advantage: tax efficiency that speaks directly to investor priorities. Unlike traditional partnerships, which offer limited flexibility in tax structuring, REITs combine the best of both worlds: corporate structure and the flow-through benefits. This hybrid model allows funds to optimize for the 199A Qualified Business Income (QBI) deduction—up to 20%—while avoiding the double taxation that plagues standard corporations.

What is a Private REIT?

A REIT is a type of tax entity, organized as a corporation or trust, that owns income-producing real property. They can range from single-asset entities to well-diversified portfolio entities and can hold a wide variety of property types; anything from apartment buildings to skyscrapers to commercial retail stores, and everything in between.

Most REITs shares are listed and traded publicly on major stock exchanges and offer several benefits to investors. REITs are taxed as a corporation, but are also afforded some of the benefits of a flow through entity. In their simplest tax form, a REIT functions like a hybrid of the two.

Diverging from a Typical Corporation

One of the biggest downfalls of a corporation is the double taxation of earnings. Income tax is paid at the corporate level when earned and then tax is paid again on the dividends distributed to the shareholders.

REITs, however, are allowed an additional tax deduction for dividends paid to shareholders. That means to the extent the REIT pays dividends equal to taxable income, there is no tax liability at the REIT. In essence, earnings are passed through to the investors in real time and many see cash flow from their investment early on.

When the REIT makes distributions to shareholders, management has the ability to designate certain distributions as a return of capital rather than a taxable dividend, which can provide tax deferred cash flow to the investors. If the REIT does make taxable distributions, the ordinary dividends paid to the shareholders are eligible for the Qualified Business Income (QBI) deduction at the shareholder level; a deduction otherwise limited to flow-through distributions.

What Investor Types Can Benefit?

Private REITs aren’t just tax-efficient—they’re investor-friendly. Here’s how different investor types benefit:

Foreign Investors

• REITs function like a blocker corporation in a real estate investment fund, so setting up the REIT as the investment entity reduces the number of entities needed in the structure.
• Ordinary dividends from a REIT are not subject to foreign withholding.

IRA and Other Tax-Exempt Investors

• Dividends from a REIT do not constitute Unrelated Business Taxable Income (UBTI).

Individual and Trust Investors

• Ordinary dividends are QBI deduction eligible.
• Dividends related to the sale of real property by the REIT are designated as capital gain dividends and are eligible for capital gain rates.
• Regular cash flow for investors as REITs pay out dividends to reduce their taxable income.
• Early distributions from a REIT can be classified as return of capital to the investor as opposed to being a taxable dividend.

Why Isn't Every Real Estate Entity a Private REIT?

Though there are numerous benefits of using a private REIT in your real estate structure, this entity structure is not without its pitfalls. REITs require upfront planning and ongoing compliance. From organizational setup to IRS reporting, the structure demands precision.

Use a Trusted Advisor

In a market flooded with options, REITs offer a way to differentiate, optimize, and deliver. Having the right advisors to guide you makes all the difference. Our team can help you navigate a REIT opportunity.