Real estate investment trusts are popular vehicles for large-scale real estate investments, but do they have any application to your short-term rental business? Many publically-listed real estate companies organize themselves as REITs for tax benefits and organizational purposes, but that doesn’t mean smaller businesses can’t benefit from organizing their assets as a REIT as well. They’re not suitable for every Airbnb hosts, but many people might find that REITs have some benefits that are worth exploring.
What is a Real Estate Investment Trust?
A REIT, or Real Estate Investment Trust, is a company that owns or provides financing for income-producing real estate. Similar to mutual funds, REITs also have shareholders and pay dividends. REITs enable ordinary investors to invest in portfolios of properties via the purchase of stocks. The majority of REITs are traded on major stock exchanges, however, there are also public non-listed REITs and private REITs. REITs generally fall into two categories:
These REITs generate income by the sale of and collection of rent on the properties that they own. As far as short-term rental REITs, there are an estimated 50,000 self-storage facilities in the United States. Self-storage REITs represent some of the country’s largest owners and operators of self-storage facilities and include:
- Extra Space Storage Inc. (EXR)
- Public Storage (PSA)
- CubeSmart (CUBE)
- Life Storage, Inc. (LSI)
- National Storage Affiliates Trust (NSA)
- Global Self Storage, Inc. (SELF)
How to Form A REIT
REITs may own all different types of properties, including both residential and commercial real estate. Companies must meet certain criteria to qualify as a REIT. Here are the guidelines:
- The organization must invest at least 75 of its total assets in real estate.
- At least 75% of its gross income must come from rents, mortgage interest from financing real property, or real estate sales.
- The organization must pay at least 90% of its taxable income in dividends each year.
- Sole proprietors can’t form REITs, so the organization must be a legal entity.
- The company must have a board of directors or trustees that manage operations.
- It must have at least 100 shareholders with no more than 50% owned by five or fewer individuals.
Are REITs Expensive?
The costs to set up a REIT are substantial. Given that majority of REITs are multistate entities, the accounting work needed to set up a REIT is complex and the accounting fees can be around $500K just to form the REIT.
Should I form a REIT for my Short-Term Rental Business?
If you own a significant number of properties that you rent out on Airbnb and finding investors for your properties comes easy to you, it may be time to consider forming a REIT if you have already established a corporation for your real estate business. However, there are a number of complex requirements for REITs, including organizational, operational, distribution and compliance requirements. You must also establish a board of managers or trustees as the management for your REIT.
REIT Filing Forms
All real estate investment trusts must file Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts. This form reports income, losses, deductions, and other important tax info. REITs are also subject to state corporate income taxes, as well as, local taxes.
A REIT can also claim deductions for dividends paid (DPD) to shareholders. Similarly, corporate shareholders can also claim deductions for dividends received (DRD). The DPD and DRD generally eliminate federal tax liability for the trust, so shareholders deal with most of the tax liabilities.
However, tax structures vary by state, so local taxes might apply. Certain states, like Maryland and Indiana, eliminated DPD to they can generate more tax revenues from REITs. As a result, the REIT might have tax liabilities in the states where it has property.
You should refer to the Multistate Tax Commission (MTC) website in order to determine which state and local taxes are applicable to your REIT.
REIT Tax Deadlines
Generally, REITs must file Form 1120-REIT by the 15th day of the 3rd month after the tax year ends. Newer trusts must also file a short-period return. This only applies when the REIT is formed within the tax year. This return is also due by the 15th day of the 3rd month after the tax period ends.
The Short-Term Rental Tax Specialists
REITs aren’t viable for most Airbnb hosts, but you have other options. Proper tax planning can save you a boatload on taxes, and it’s much more affordable than forming a REIT. Shared Economy Tax specializes in tax planning for short-term rental business, so we can help you develop a plan that fits your business. Get started today with a complimentary one-on-one strategy session with a certified tax pro. You can also sign up for our tax tips newsletter using the form below.