What you need to do to start a REIT

Forming a REIT requires you to meet specific structural and operational requirements set by the Internal Revenue Service, then register with the Securities and Exchange Commission if you plan to sell shares to the public. The process typically takes several months and involves choosing a business structure, acquiring real estate assets, setting up a management team, and filing formal documents with both federal agencies. You will also need to decide whether to register as a public REIT (which allows you to sell shares on an exchange) or remain private (which limits your investors but has fewer regulatory demands).

The timeline from formation to operation usually runs four to nine months, depending on whether you choose public or private status and how quickly you can assemble your property portfolio and management structure. Many people work with a securities attorney and a tax advisor throughout this process because the rules are specific and mistakes can cost you the REIT tax status you are trying to achieve.

Key Takeaways

  • A REIT must be organized as a corporation, trust, or association and must have at least 100 shareholders after the first year of operation.
  • You must invest at least 75 percent of your assets in real estate and real estate-related debt, and at least 75 percent of your gross income must come from rents, mortgage interest, or property sales.
  • You must distribute at least 90 percent of your taxable income to shareholders as dividends each year to maintain REIT status.
  • Public REITs must register with the SEC and file regular financial reports; private REITs have fewer disclosure requirements but cannot sell shares to the general public.
  • You will need a board of directors, a management structure, and legal documentation including articles of incorporation and bylaws before you can begin operations.

Choosing between public and private REIT structure

A public REIT registers its shares with the Securities and Exchange Commission and lists them on a stock exchange or over-the-counter market. This allows you to raise capital from any investor and gives shareholders liquidity — they can sell their shares whenever the market is open. The trade-off is substantial: you must file quarterly and annual reports with the SEC, maintain detailed financial records, comply with securities laws, and meet strict governance standards. The SEC filing process alone typically costs $100,000 to $300,000 in legal and accounting fees, and you will have ongoing compliance costs every year.

A private REIT does not register with the SEC and cannot offer shares to the general public. You can only sell shares to accredited investors (people with a net worth above $1 million or annual income above $200,000) or to a limited number of non-accredited investors under Regulation D. Private REITs have much lower startup costs and simpler reporting requirements, but they are harder to exit — there is no public market for the shares, so investors cannot easily sell. Many smaller REITs start private and convert to public status later if they grow large enough.

Meeting the asset and income requirements

The IRS requires that at least 75 percent of your REIT's total assets be invested in real estate, mortgages on real property, or cash. The remaining 25 percent can be in other investments, but the bulk of your portfolio must be property-focused. This is measured at the end of each quarter, so you need to track your asset composition regularly and adjust if you drift out of compliance.

On the income side, at least 75 percent of your gross income must come from real estate sources: rent from tenants, interest on mortgages, or gains from selling property. The remaining 25 percent can come from other sources. If you fall below these thresholds in any year, you lose your REIT status and face back taxes plus penalties. This is why many REITs hire a tax professional to monitor compliance quarterly rather than waiting until tax time to discover a problem.

Distributing 90 percent of taxable income to shareholders

REITs do not pay corporate income tax on the earnings they distribute to shareholders. Instead, the tax burden passes through to the shareholders themselves — they pay tax on the dividends they receive. To maintain this tax advantage, you must distribute at least 90 percent of your taxable income as dividends each year. This is a hard requirement; if you retain more than 10 percent, you lose REIT status.

This distribution requirement shapes how you manage cash flow. You cannot reinvest most of your profits back into the business the way a regular corporation can. Instead, you must pay out dividends and fund growth through new debt or new equity raises. Many REITs use a combination of mortgage debt and share offerings to finance property acquisitions, since they cannot rely on retained earnings.

Registering with the SEC if you go public

If you choose to form a public REIT, you must file a registration statement with the SEC before you can offer or sell shares. This document includes detailed information about your properties, your management team, your financial condition, and the risks investors face. The SEC reviews your filing, asks questions, and may require revisions before it declares the registration effective — a process that typically takes two to four months.

Once your registration is effective, you can list your shares on an exchange (such as the New York Stock Exchange or NASDAQ) or trade them over-the-counter. You then become subject to ongoing reporting: you must file a quarterly report (Form 10-Q) within 45 days of quarter-end and an annual report (Form 10-K) within 60 days of year-end. You must also file a proxy statement before any shareholder meeting and disclose material events on Form 8-K. This level of transparency is the price of access to public capital markets.

Building your management structure and legal foundation

Every REIT needs a board of directors (or trustees, if organized as a trust) and a management team. The board oversees strategy and compliance; the management team handles day-to-day operations. For a public REIT, the board must have a majority of independent directors — people with no material relationship to the REIT or its management. For a private REIT, the board structure is more flexible, but you still need one.

You will also need to draft and file articles of incorporation (or a trust agreement if you organize as a trust), bylaws, and an operating agreement if you have multiple owners. These documents spell out how the REIT is governed, how dividends are paid, how shares are issued, and what happens if a shareholder wants to exit. A securities attorney typically drafts these documents and ensures they comply with both state law and IRS rules. This legal work usually costs $15,000 to $50,000 depending on complexity.

Assembling your initial property portfolio

Before you can operate as a REIT, you need to own or control real estate assets. Many REITs start by acquiring three to ten properties in a single sector — apartments, office buildings, retail centers, or industrial warehouses — to establish a clear investment focus. You will need to conduct due diligence on each property: inspect it, review the leases, verify the tenant credit, and get an appraisal.

You will also need to secure financing. Most REITs use a mix of debt and equity. You might finance 60 to 70 percent of the purchase price with mortgages and raise the remaining 30 to 40 percent from investors. Lenders will want to see your business plan, your management team's track record, and your financial projections before they commit. This is why many REIT founders have prior experience in real estate or finance — it makes it easier to secure both debt and investor capital.

Filing your tax election with the IRS

Once you have organized your entity and acquired your properties, you must file Form 1120-REIT (U.S. Income Tax Return for Real Estate Investment Trusts) with the IRS to elect REIT status. This form is due by the tax return deadline for the year in which you want REIT status to take effect. You can file it as early as the year you are organized, or you can wait a year or two until your asset and income profile clearly meets the requirements.

The IRS does not issue a separate approval letter confirming REIT status — your status is effective when you file the form correctly and meet all the requirements. However, if the IRS later audits you and finds you did not meet the requirements, you can lose REIT status retroactively and owe back taxes. This is another reason to work with a tax advisor who understands REIT rules.

Frequently Asked Questions

How much money do I need to start a REIT?

There is no minimum capital requirement set by law, but practically you need enough to acquire at least one income-producing property and cover legal, accounting, and operating costs for the first year. Most REITs raise at least $5 million to $10 million before they begin operations, though some private REITs start smaller. Public REITs typically raise $50 million or more because the SEC filing and compliance costs are substantial.

Can I convert an existing real estate business into a REIT?

Yes. You reorganize your existing business into a REIT structure, ensure your assets and income meet the 75 percent thresholds, and file Form 1120-REIT with the IRS. You may owe taxes on any gains from the reorganization, so work with a tax advisor to structure the conversion efficiently. Some existing businesses convert to REIT status to reduce their tax burden once they reach a certain size.

What happens if I fail to distribute 90 percent of my income?

You lose REIT status for that year and the following year. The REIT is then taxed as a regular corporation on all its income, and shareholders pay tax again on dividends — creating double taxation. You can request reinstatement if the failure was due to reasonable cause, but this requires filing a letter with the IRS and paying a penalty. It is far easier to maintain compliance from the start.

Do I need a certain number of properties to form a REIT?

No minimum number is set by law. However, most REITs own at least three to five properties to diversify risk and demonstrate a real estate business (rather than a single property investment). The IRS looks at whether your structure and operations are consistent with being a REIT, and owning just one property can raise questions about your intent.

Can I be both a REIT and an operating company?

No. A REIT is a passive investment vehicle — it owns property and collects rent, but it does not operate the business on the property. If you operate a hotel, a nursing home, or a retail store yourself, you cannot be a REIT. You can own the building and lease it to an operating company, but you cannot run the operations yourself and maintain REIT status.