Setting up a REIT requires you to form a legal entity, buy real estate or mortgage debt, and meet strict federal rules about ownership, income, and distributions

A REIT (Real Estate Investment Trust) is a corporation or trust that owns and operates income-producing real estate or finances real estate purchases. To create one, you need to register with the Securities and Exchange Commission (SEC), structure your ownership to meet IRS requirements, and commit to distributing at least 90 percent of taxable income to shareholders annually. The process typically takes several months and involves lawyers, accountants, and real estate professionals.

The basic steps are: form a legal entity (usually a corporation or trust), acquire real estate or mortgage assets, register with the SEC, and file the necessary tax forms with the IRS to claim REIT status. You must also maintain compliance with ongoing rules about asset composition, income sources, and shareholder distribution. Most people do not do this alone — you will need a securities attorney and a tax advisor who understands REIT law.

Key Takeaways

  • You must form a legal entity (corporation or trust), own real estate or mortgage debt, and register with the SEC before operating as a REIT.
  • At least 75 percent of your assets must be real estate, cash, or government securities, and at least 75 percent of income must come from real estate rents or mortgages.
  • You must distribute at least 90 percent of taxable income to shareholders each year, which means a REIT cannot retain most of its earnings.
  • The SEC registration process requires a prospectus, financial statements, and disclosure of your business plan, and typically takes three to six months.
  • You will need a securities attorney, a tax advisor familiar with REIT rules, and a real estate team to handle acquisitions and operations.

Form a Legal Entity and Acquire Real Estate

Start by forming a corporation or trust under your state's law. Most REITs are structured as corporations because the rules are clearer and more familiar to investors. You file articles of incorporation with your state, obtain an Employer Identification Number (EIN) from the IRS, and set up a board of directors. The entity must be managed by a board, not by a single owner, so you will need at least three directors (though some states allow fewer for smaller entities).

Next, acquire the real estate or mortgage assets that will generate income. This can be office buildings, apartments, shopping centers, warehouses, hotels, or mortgages on real estate. You must own the assets before you register with the SEC, because the SEC will ask for details about what you own, where it is, how much it costs, and what income it produces. You do not need to own everything on day one, but you need enough to show investors a real business plan.

The real estate must be held for the long term and managed for income, not flipped for quick profit. If you buy and sell properties frequently, the IRS may challenge your REIT status because it looks like you are a dealer rather than an investor. Keep detailed records of when you bought each property, why you bought it, and how long you plan to hold it.

Understand the IRS Asset and Income Tests

The IRS has strict rules about what a REIT can own and where its money comes from. At least 75 percent of your total assets must be real estate, cash, or U.S. government securities. The remaining 25 percent can be other investments, but if you stray too far from real estate, you lose REIT status. This rule is checked at the end of each quarter, so you need to track your asset mix constantly.

At least 75 percent of your gross income must come from real estate rents, mortgage interest, or sales of real property. The remaining 25 percent can come from other sources — dividends, interest on non-real-estate debt, or gains on sales of non-real-estate assets — but most of your money has to flow from the real estate itself. If you own apartment buildings and collect rent, you meet this test. If you own apartment buildings but also run a management company that charges fees, the fees count toward the 75 percent only if they are paid by tenants for services related to the real estate.

You must also pass a test on how concentrated your ownership is. No more than 50 percent of your shares can be owned by five or fewer people at any time during the last half of the tax year. This rule prevents a REIT from being a vehicle for one or two wealthy investors to avoid taxes. If you start as a small private REIT, you can own it yourself initially, but once you go public or bring in outside investors, you have to monitor this limit.

Register with the SEC and File a Prospectus

Before you can sell shares to the public, you must register with the SEC. You file a Form S-1 or Form S-11 (S-11 is the form designed for REITs) along with a prospectus that describes your business, the real estate you own, the risks investors face, and how you will use the money you raise. The prospectus must include audited financial statements for at least two years, a detailed description of each property you own, and the names and backgrounds of your board and management team.

The SEC review process typically takes three to six months. The SEC will send you comments asking for clarification, more detail, or changes to your disclosure. You respond to each comment, and the SEC reviews again. This cycle repeats until the SEC is satisfied that investors have enough information to make an informed decision. You cannot sell shares until the SEC declares your registration effective.

If you want to start smaller and avoid the public registration process, you can form a private REIT and sell shares only to accredited investors (people with high net worth or income). Private REITs have fewer disclosure requirements, but they still must meet the IRS asset and income tests and distribute 90 percent of taxable income. Private REITs are less common because they are harder to sell shares in and harder to exit, but they avoid the SEC registration burden.

Meet the 90 Percent Distribution Requirement

Every year, you must distribute at least 90 percent of your taxable income to shareholders as dividends. This is the core trade-off of REIT status: you get a tax deduction for the distributions, but you cannot retain earnings to reinvest or build reserves. If you earn $10 million in taxable income, you must pay out at least $9 million to shareholders.

The distribution is based on taxable income, not cash flow. This matters because real estate generates depreciation deductions that reduce taxable income but do not reduce cash. You might have $10 million in cash flow but only $6 million in taxable income (because depreciation reduced it by $4 million). You would distribute $5.4 million (90 percent of $6 million) and keep $4.6 million in cash. This is one reason REITs can fund growth and maintenance without raising new capital every year.

You must track distributions carefully and report them to shareholders on Form 1099-DIV. Shareholders pay income tax on the distributions they receive, and the tax rate depends on whether the distribution is ordinary income or capital gains. Most REIT distributions are taxed as ordinary income, which is why REIT shares are often held in retirement accounts where the tax is deferred.

File Annual Tax Returns and Maintain Compliance

Once you are operating as a REIT, you file Form 1120-REIT with the IRS each year. This form reports your income, expenses, distributions, and asset composition. You must certify that you meet the asset test (75 percent in real estate) and the income test (75 percent from real estate sources) at the end of each quarter. If you fail either test, you have a grace period to fix it, but if you do not, you lose REIT status for that year and the next year.

You also file quarterly reports with the SEC (Form 10-Q) and an annual report (Form 10-K) if you are a public REIT. These reports update investors on your properties, financial performance, and any major changes to your business. Private REITs have fewer reporting requirements, but they still must file annual tax returns and maintain records of their assets and income.

Compliance is ongoing. You need a tax advisor who understands REIT rules to review your income and expenses each quarter, confirm that you are meeting the asset and income tests, and plan your distributions. You also need a real estate team to manage the properties, collect rent, and handle maintenance. Many REITs hire a professional management company to run the day-to-day operations.

Hire Professional Advisors and Budget for Costs

Setting up a REIT requires specialists. You need a securities attorney to draft your articles of incorporation, prepare the SEC registration documents, and advise on compliance. You need a tax advisor (usually a CPA or tax attorney) to structure the entity, plan distributions, and file tax returns. You need a real estate attorney to review property purchases and leases. You may also need an accountant to handle bookkeeping and financial reporting.

The cost of setting up a public REIT typically ranges from $500,000 to $2 million, depending on the complexity of your properties and the size of your offering. This includes legal fees, accounting fees, SEC filing fees, and the cost of preparing audited financial statements. Private REITs are cheaper to set up — often $100,000 to $300,000 — because they skip the SEC registration process.

Once you are operating, you will have ongoing costs: property management fees (typically 3 to 8 percent of rent collected), accounting and tax preparation, insurance, maintenance, and capital improvements. These costs reduce the income available for distribution, so budget carefully when you set rents and acquisition prices.

Frequently Asked Questions

Can I start a REIT with just one property?

Technically yes, but it is not practical. The SEC wants to see a diversified portfolio and a real business plan. Most public REITs own at least 10 to 20 properties. Private REITs can be smaller, but investors still expect multiple properties to spread risk. Start with at least three to five properties in different locations.

What happens if I fail the 75 percent asset test?

You have a grace period to fix it. If you fail at the end of a quarter, you can sell non-real-estate assets or buy more real estate to get back into compliance by the end of the next quarter. If you do not fix it, you lose REIT status for that year and the following year, and you owe corporate income tax on all your income.

Do I have to go public to be a REIT?

No. You can form a private REIT and sell shares only to accredited investors. Private REITs avoid SEC registration but are harder to sell shares in and harder to exit. Most small REITs start private and go public later if they grow large enough.

Can I use REIT status to avoid paying income tax?

No. You do not pay corporate income tax on the income you distribute, but shareholders pay income tax on the dividends they receive. The tax is deferred, not eliminated. You still pay tax on any income you retain (the 10 percent you do not distribute).

How long does it take to set up a REIT?

For a private REIT, four to six months. For a public REIT, six to twelve months, depending on how quickly the SEC reviews your registration and how complex your properties are. The longest part is usually preparing audited financial statements and SEC disclosure documents.