What you actually need to do to start a REIT

Starting a REIT requires you to meet specific legal and structural requirements set by the Internal Revenue Service, then register with the Securities and Exchange Commission if you plan to raise money from public investors. You cannot simply declare yourself a REIT — the IRS must recognize your structure, and the SEC must clear your offering documents before you can sell shares. The process typically takes several months and involves lawyers, accountants, and real estate appraisers working through a defined sequence.

The path splits depending on whether you want to raise money from the public (a registered REIT) or only from accredited investors (a non-traded REIT). Both require the same IRS recognition, but registered REITs face stricter SEC oversight and disclosure rules. Most people starting their first REIT work with a law firm that specializes in real estate securities, because the filing requirements are technical and mistakes can delay launch or create tax problems later.

Key Takeaways

  • You must own real property or mortgages, hold at least 100 shareholders after the first year, distribute 90 percent of taxable income to shareholders, and keep at least 75 percent of assets in real estate or mortgages.
  • The IRS requires you to file Form 1120-REIT with your first tax return and maintain detailed records proving you meet the income and asset tests every year.
  • If you plan to raise money from public investors, the SEC requires a registration statement (Form S-1 or S-11) that includes audited financial statements, property appraisals, and management biographies.
  • Non-traded REITs (sold only to accredited investors) skip SEC registration but still need state securities filings and ongoing compliance reporting.
  • Legal and accounting costs for launching a registered REIT typically range from $250,000 to $500,000 or more, depending on the complexity of your properties and investor base.

Meeting the IRS structural requirements

The IRS has four main tests you must pass to be recognized as a REIT. First, you must be a corporation, trust, or association taxed as a corporation. Second, you must have at least 100 shareholders after your first year of operation (though you can start with fewer). Third, no more than 50 percent of your shares can be held by five or fewer people at any time during the tax year. Fourth, your shares must be transferable — meaning shareholders can sell them, though you can restrict who can buy.

Beyond structure, you must pass the income test: at least 75 percent of your gross income must come from real estate sources like rent, mortgage interest, property sales, or lease income. The remaining 25 percent can come from other sources, but there are limits on how much can come from things like personal property rentals or dealer sales. You must also pass the asset test: at least 75 percent of your total assets must be invested in real property, mortgages, or cash, and no more than 10 percent can be in securities of any single issuer.

Finally, you must distribute at least 90 percent of your taxable income to shareholders each year in the form of dividends. This is the core trade-off of REIT status: you avoid corporate-level taxation, but you must pass most profits to shareholders rather than retaining them for growth.

Filing with the IRS and proving ongoing compliance

To notify the IRS that you are a REIT, you file Form 1120-REIT with your first tax return. This form reports your income, expenses, and distributions, and it signals to the IRS that you are claiming REIT status. You do not need advance approval — the IRS recognizes you as a REIT when you file the form correctly — but you must meet all four structural tests and both the income and asset tests in that first year.

After that first year, you must continue to meet the tests every year. The IRS conducts spot checks, and if you fail any test in a given year, you lose REIT status and face corporate-level taxation on all your income. You can request relief if you fail a test by a small margin (usually less than 1 percent) and correct it within a set time, but the process is complex and expensive. Most REITs hire a compliance officer or work with an accounting firm to track these tests quarterly and ensure they stay within bounds.

You must also keep detailed records: property appraisals, lease agreements, income statements, shareholder lists, and board meeting minutes. The IRS can request these records at any time, and state tax authorities may ask for them too. Many REITs use a REIT-specific accounting software or hire a firm that specializes in REIT compliance to manage this documentation.

SEC registration if you raise money from the public

If you plan to sell shares to the general public, you must register with the SEC before you offer or sell a single share. The registration process requires you to file a registration statement — usually Form S-1 (for smaller offerings) or Form S-11 (specifically for real estate companies) — along with extensive exhibits and financial documents.

Your registration statement must include audited financial statements for at least two years, appraisals of all properties you own or plan to own, detailed descriptions of each property and its tenants, management biographies and compensation, a description of your business strategy, and risk factors. The SEC reviews this filing, asks questions (called "comments"), and you revise and resubmit until they declare the registration effective. This back-and-forth typically takes three to six months, though it can take longer if your properties are complex or your financials raise questions.

Once your registration is effective, you can begin selling shares. You remain subject to ongoing SEC reporting: you must file quarterly reports (Form 10-Q), annual reports (Form 10-K), and current reports (Form 8-K) for material events. You must also hold annual shareholder meetings and provide proxy statements. The SEC also requires you to have an independent board of directors and an audit committee, and you must have your financial statements audited every year.

Non-traded REIT registration and state filings

If you only want to raise money from accredited investors (people with income over $200,000 or net worth over $1 million), you can skip SEC registration and instead file a Form D with the SEC within 15 days of your first sale. This is a much simpler filing — just basic information about your offering and the amount raised.

However, you still must register with state securities regulators in every state where you plan to sell shares. Each state has its own REIT registration requirements, and some states require you to file detailed offering documents, property appraisals, and management information. A few states allow you to register by coordination (using your SEC filing if you had one) or by notification (a simplified process), but most require a full state application. State filings typically cost $5,000 to $20,000 per state, depending on the state and the complexity of your offering.

Non-traded REITs also face ongoing compliance requirements: you must file annual reports with state regulators, maintain detailed records of all investors and sales, and in some states, provide annual statements to shareholders. You still must meet all IRS requirements for REIT status, including the 90 percent distribution requirement and the income and asset tests.

Assembling your team and budgeting for launch

You will need at least three professional advisors to launch a REIT: a securities lawyer, a tax accountant, and a real estate appraiser. The securities lawyer drafts your offering documents, handles SEC or state filings, and advises on compliance. The tax accountant structures your entity, ensures you meet IRS requirements, and sets up your accounting systems. The appraiser values your properties for both the offering documents and ongoing compliance.

For a registered REIT raising money from the public, expect to spend $250,000 to $500,000 or more on legal, accounting, and appraisal fees. For a non-traded REIT, costs are typically lower — $100,000 to $250,000 — because you skip SEC registration. These are one-time launch costs; ongoing compliance costs (annual audits, quarterly reporting, state filings) typically run $50,000 to $150,000 per year depending on the size of your REIT and the number of properties.

You should also budget for investor relations and marketing. If you are raising money from the public, you will need to create a prospectus, a website, and marketing materials. If you are raising from accredited investors, you will still need offering documents and a way to communicate with potential investors. Many REITs hire a consultant or marketing firm to help with this, which can cost $20,000 to $100,000 depending on the scope.

Timeline from concept to first share sale

The timeline depends on whether you register with the SEC. For a non-traded REIT, you can typically launch in three to four months: one month to assemble your team and structure your entity, one month for appraisals and offering documents, one month for state filings, and one month for final compliance setup. For a registered REIT, add three to six months for SEC review and approval, so the total is typically six to ten months.

The critical path is usually the SEC review (if you are registering) or the state filings (if you are not). Everything else — entity formation, appraisals, accounting setup — can happen in parallel. Many REITs start the process by identifying their initial properties and getting appraisals done while their lawyers are drafting documents, so they can move quickly once the SEC or state regulators begin their review.

Frequently Asked Questions

Do I need to own properties before I start a REIT?

No, but you must have a clear plan to acquire them. Most REITs identify their initial properties before they launch, get them appraised, and describe them in detail in their offering documents. Some REITs launch with no properties and raise capital first, then use that capital to buy properties, but this requires you to explain your acquisition strategy to investors and regulators in advance.

Can I start a REIT with just one property?

Yes, there is no minimum number of properties required by the IRS. However, most investors expect a REIT to own multiple properties to spread risk, and most state regulators and the SEC expect you to have a diversified portfolio. A single-property REIT is possible but harder to market to investors.

What happens if I fail the 90 percent distribution requirement?

If you do not distribute at least 90 percent of your taxable income, you lose REIT status for that year and face corporate-level taxation on all your income. You can request relief from the IRS if you fail by a small amount and correct it within a set time, but this is expensive and complicated. Most REITs distribute more than 90 percent to avoid this risk.

Can I change my REIT structure after launch?

Yes, but it requires SEC filings (if you are registered), state filings, and IRS notification. Major changes like converting from a registered to a non-traded REIT or changing your property focus require new offering documents and investor approval. Minor changes like adjusting your dividend policy or adding a property typically require just updated disclosures.

What is the difference between a REIT and a real estate fund?

A REIT is a specific legal structure that receives tax benefits from the IRS in exchange for meeting strict requirements. A real estate fund is a broader term for any investment vehicle that holds real estate. A real estate fund can be structured as a REIT, but it does not have to be. Non-REIT real estate funds face corporate-level taxation but have more flexibility in how they operate and distribute income.