What Is a Captive REIT?

Real estate offers a plethora of attractions to investors, such as potential appreciation, tax advantages, and passive income. One way for individual shareholders to gain access to commercial property without the hassle of direct ownership...

investiStock-1226452601

Real estate offers a plethora of attractions to investors, such as potential appreciation, tax advantages, and passive income. One way for individual shareholders to gain access to commercial property without the hassle of direct ownership is through a Real Estate Investment Trust (REIT). But have you ever heard of a Captive REIT?

How Do REITs Operate?

REITs first appeared in 1960 and have become increasingly popular over the years. They come in different forms, with some being privately offered but registered with the SEC, while others are traded on securities exchanges. There are also REITs with limited availability, accessible only to accredited investors due to higher risk and limited disclosures.

One advantage of the REIT structure is that they operate as pass-through corporations, which means they don't pay federal income taxes under certain conditions. These conditions include generating at least 75 percent of their income from real estate or related activities, having at least 75 percent of their assets in real estate, distributing a minimum of 90 percent of taxable income to shareholders, and having at least 100 shareholders. Shareholders themselves pay taxes on the income they receive from the REIT.

How Can a REIT Be Captive?

A captive REIT is a REIT controlled by a single company, often a subsidiary of a larger organization. For example, a corporation with many branches might have a captive REIT as its real estate division. By complying with the REIT rules, the parent company can enjoy certain tax advantages for the entire organization.

To meet the requirement of having at least 100 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, those rent payments can be tax-deductible for the parent company. In return, the captive REIT earns income that it pays to the executive shareholders as dividends, effectively benefiting the parent company. Certain states have implemented measures to limit this tactic in order to safeguard their revenue.

Can I Invest in a Captive REIT?

While it is possible for outsiders to indirectly invest in a captive REIT by buying shares of a corporation that has a REIT as a subsidiary, this approach is not commonly pursued by individual investors. It is a rather specialized and focused investment strategy.

Remember, investing in any form carries inherent risks. The value of your investment may fluctuate, and there is no guarantee of receiving any income. Be sure to conduct thorough research and consider seeking professional advice before making any investment decisions.

1