How to Be a Real Estate Mogul With Less Risk

Be a real estate mogul.By Michele Lerner

Want to be a real estate mogul but without the hassle of directly owning property?

Real Estate Investment Trusts, or REITs, offer a simpler -- and safer -- way to reap the benefits of a diversified real estate portfolio through owning shares of a portfolio of property.

REITs, which are publicly traded on stock exchanges, are trusts that own properties like apartments, office buildings, hotels, warehouses, shopping centers and health care facilities (such as hospitals and nursing homes). Most, but not all, operate these properties, too. About 10 percent of REITs are mortgage REITs that invest in mortgages rather than real property.

REITs were created by Congress in 1960 so that average investors could invest in large-scale, income-producing real estate. Instead of joining a real estate partnership, investors can buy REIT shares without any minimum investment requirements.

REIT Rules

As of Jan. 1, 2012, there were 166 REITs registered with the SEC, the majority of which trade on the New York Stock Exchange. There are also REITs that are not publicly traded, which is why, according to the IRS, there are about 1,100 REITs in the U.S. that have filed tax returns.

In order to qualify as a REIT, companies must meet IRS provisions and have the majority of their assets and income tied to real estate investment. REITs must distribute 90 percent of their taxable income to shareholders every year. REITs can deduct dividends paid to shareholders from their corporate taxable income, so most REITs avoid paying corporate tax by simply sending all of their taxable income to shareholders.

If you own REIT shares, you pay federal and state taxes on the dividends you receive, and any capital gains distributions that the REIT makes if it sells property. REITs are usually eligible to be held in tax-deferred retirement accounts such as an IRA, a 401(k) or a pension plan.

Read the rest of this story on Daily Finance.

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