What is a REIT?
Last updated August 2026
Short answer
A REIT is best understood as a tax structure rather than an asset class. Every distinctive thing about it follows from the bargain it makes with the tax code.
The bargain at the centre
An ordinary company pays corporate tax and then shareholders pay again on dividends. A REIT escapes the first layer by committing to distribute the income.
The requirement is at least 90% of taxable income each year, alongside tests on what it owns and where its income comes from.
One consequence is that REITs retain little cash, so growth is usually funded by issuing shares or borrowing. That makes them unusually sensitive to the cost of capital.
What they actually own
Equity REITs hold physical property and collect rent: apartments, warehouses, shopping centres, offices, data centres, cell towers, storage, healthcare facilities.
The sectors behave differently enough that lumping them together is misleading. Data centre and industrial REITs have had a very different decade from office.
Mortgage REITs hold loans rather than buildings and earn the spread between borrowing and lending rates, usually with leverage. They are a separate proposition wearing a similar name.
How the dividends are taxed
Most REIT distributions are ordinary income at your marginal rate, because the REIT never paid corporate tax on that income.
Part of a distribution may be classified as return of capital, which is not taxed immediately and instead reduces your cost basis, increasing the eventual gain when you sell.
Classification is often finalised late, which is why REIT holders receive corrected tax forms more often than most investors.
Try it in Walnut
Walnut reads your connected brokerage and can show how much of your portfolio sits in property, including REITs held inside funds you did not buy for that reason.
Where to hold one
Tax-advantaged accounts suit REITs well, since the ordinary-income distributions are not taxed as received.
In a taxable account the same holding is materially less efficient for a high earner, which is a textbook asset location decision.
Broad index funds already contain REITs. Adding a dedicated REIT fund increases the weight rather than introducing something absent.
What to look at before buying
The property type, because the label REIT says almost nothing about the business.
Leverage and debt maturities. A REIT refinancing a large share of its debt into higher rates has a problem no yield figure discloses.
Whether the distribution is covered by cash flow. A yield sustained by borrowing or issuing shares is not the same as one funded by rent.
You may already own them
Broad US index funds include listed REITs as part of the market, so most diversified portfolios carry some property exposure without a dedicated holding.
Adding a REIT fund therefore increases an existing weight rather than introducing a missing asset class, which is a reasonable decision made deliberately and a common one made by accident.
Target-date funds vary in whether they hold a separate real estate sleeve, and the prospectus says which.
Sources
REIT qualification requirements, including the distribution test, are set out by the IRS in the Instructions for Form 1120-REIT. Tax treatment of distributions is in Publication 550. Walnut is informational and is not an investment adviser. This guide is educational and not personalized investment or tax advice.
FAQ
What is a REIT in simple terms?
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A company that owns or finances income-producing real estate, structured so it pays no corporate tax on income it distributes. In exchange it must pay out at least 90% of its taxable income to shareholders each year, which is why REIT yields tend to be high.
Why are REIT dividends taxed differently?
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Because the REIT itself was not taxed on the income. Most REIT distributions are ordinary income taxed at your marginal rate rather than qualified dividends at capital gains rates. A portion may qualify for the qualified business income deduction.
Is a REIT the same as owning property?
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No. You own shares in a company, traded like any other listed stock, with no tenants to manage and no mortgage in your name. You also have no control over which properties are bought or sold, and the share price moves with the stock market as well as with property values.
Where should a REIT be held?
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In a tax-advantaged account where possible, precisely because the distributions are ordinary income. A REIT held in a taxable account for a high earner is one of the clearer examples of asset location mattering.
What are the main types of REIT?
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Equity REITs own properties and collect rent, which is the large majority. Mortgage REITs lend against real estate and earn on the interest spread, and behave much more like leveraged bond portfolios. The two are not substitutes.
Do REITs protect against inflation?
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Partially and not reliably. Leases can reset upward and property values often rise with prices, but REITs are also sensitive to interest rates, which typically rise in the same conditions. Both effects are real and they work against each other.
Do I already own REITs?
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Almost certainly, if you hold a broad US index fund, because listed REITs are part of the market. Adding a dedicated REIT fund increases that weight rather than filling a gap.