Real Estate & Tax-Deferral Strategies / REITs
Real Estate Investment Trusts
REITs: real estate exposure without being the landlord
A Real Estate Investment Trust (REIT) owns, operates, or finances income-producing real estate and is generally required to distribute at least 90% of its taxable income to shareholders. REITs can add diversified real estate exposure to a portfolio, but publicly traded and non-traded REITs behave very differently, and that difference matters for liquidity, volatility, and cost.
Key points
- Publicly traded REITs trade daily on stock exchanges and offer liquidity, along with stock-market volatility.
- Non-traded REITs do not trade on an exchange, may limit redemptions, and typically carry higher fees.
- REIT dividends are generally taxed as ordinary income, though a portion may be eligible for the Section 199A deduction or treated as return of capital.
- Some REITs connect to 1031 planning through 721 UPREIT structures, which carry their own long-term trade-offs.
Publicly traded vs. non-traded REITs
| Publicly traded REIT | Non-traded REIT | |
|---|---|---|
| Where it trades | Major stock exchanges | Not listed; purchased through offerings |
| Liquidity | Daily | Limited redemption programs that may be capped or suspended |
| Price | Set by the market; can be volatile | Periodic net asset value (NAV) estimates |
| Costs | Typically lower; trading costs and fund expenses | Often higher upfront and ongoing fees |
| Minimum | Price of one share or fund unit | Often $2,500 or more; investor suitability standards apply |
Common REIT sectors
REITs are not one asset class. Each sector responds differently to interest rates, the economy, and demographic trends, so how a REIT allocation is built matters as much as whether you own one.
- Net-lease retail & necessity
- Industrial & logistics
- Healthcare & medical office
- Multifamily & residential
- Self-storage
- Data centers & infrastructure
How REITs fit into your plan
If you already own rental property or a DST interest, adding REITs may increase your real estate concentration rather than diversify it. We look at all of your real estate, direct and indirect, before deciding how much belongs in your portfolio and which accounts it should be held in.
Frequently asked questions
What is a REIT?
A Real Estate Investment Trust is a company that owns, operates, or finances income-producing real estate across sectors such as retail, industrial, healthcare, multifamily, and office. To maintain REIT status, it must generally distribute at least 90% of its taxable income to shareholders each year.
What is the difference between a traded and non-traded REIT?
Publicly traded REITs are listed on a stock exchange and can be bought or sold daily at market prices. Non-traded REITs are registered with the SEC but not listed, so shares are typically redeemed only through limited, periodic programs that can be reduced or suspended. Non-traded REITs may have less day-to-day price volatility in reported values, but they are less liquid and often more expensive.
How are REIT dividends taxed?
Most REIT dividends are taxed as ordinary income rather than at qualified dividend rates. Under current law, eligible REIT dividends may qualify for the Section 199A qualified business income deduction. A portion of distributions may also be classified as return of capital, which reduces your cost basis. Holding REITs in tax-advantaged accounts is one planning consideration to discuss with your CPA.
Can a REIT be used in a 1031 exchange?
Not directly. REIT shares are securities, not real property, so purchasing them does not complete a 1031 exchange. Some investors reach a REIT indirectly by exchanging into a DST that may later be contributed to a REIT operating partnership through a Section 721 exchange.
How much of a portfolio should be in REITs?
There is no single answer. It depends on your income needs, existing real estate holdings (including property you own directly), liquidity needs, and risk tolerance. We look at real estate as one part of your total allocation rather than in isolation.
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Important information
REITs are subject to risks including changes in interest rates, real estate values, occupancy, and economic conditions. Publicly traded REITs are subject to market price fluctuation. Non-traded REITs are generally illiquid, may limit or suspend redemptions, carry fees and expenses that may be higher than publicly traded alternatives, and report values that may not reflect what an investor would receive on sale. Distributions are not guaranteed, may be reduced or suspended, and may be paid in part from sources other than cash flow, including return of capital.
This page is for general educational purposes only and is not a recommendation, an offer to sell, or a solicitation of an offer to buy any security. Patten Financial Group does not provide tax or legal advice; please consult your CPA, tax attorney, and a qualified intermediary regarding your specific situation. Patten Financial Group does not act as a qualified intermediary. All investing involves risk, including the possible loss of principal. Tax laws are subject to change.