What is a REIT?
Updated 5 July 2026 · 6 min read
A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing real estate and distributes at least 90 percent of its taxable income to shareholders as dividends. Created by Congress in 1960, the structure lets any investor hold a share of large-scale commercial property the way they would hold a stock.
Before REITs, income-producing real estate at scale belonged to institutions and the wealthy. The REIT structure changed that by wrapping buildings, and later mortgages, in a tax-advantaged company that passes its income through to shareholders. Today REITs hold everything from apartments and warehouses to data centres, cell towers, and hospitals.
The rules a REIT has to follow
REIT status is a tax election with strict ongoing tests. In exchange for meeting them, the company deducts the dividends it pays, so income is taxed once, at the shareholder level, rather than twice:
- At least 75 percent of assets must be real estate, cash, or US government securities.
- At least 75 percent of gross income must come from real estate sources such as rents or mortgage interest.
- At least 90 percent of taxable income must be distributed to shareholders as dividends each year.
- The company must have at least 100 shareholders, and no five shareholders can own more than half of it.
Equity REITs and mortgage REITs
Equity REITs own and operate property: they collect rent, manage buildings, and earn from both income and appreciation. Mortgage REITs finance property instead, earning the spread on mortgages and mortgage-backed securities, which makes them behave more like leveraged bond portfolios than like buildings. Equity REITs are by far the larger group.
Traded, non-traded, and private REITs
Publicly traded REITs list on an exchange and price continuously, with all the liquidity and volatility that implies. Private REITs sit at the other end, generally limited to institutional or accredited investors. In between sits the structure most relevant to advisors building semiliquid allocations: the public non-traded REIT, and in its modern form, the NAV REIT.
A NAV REIT is SEC-registered but unlisted. It values its portfolio and strikes a net asset value monthly, offers shares continuously at that NAV, and provides liquidity through a share repurchase plan, commonly capped at around 2 percent of NAV per month and 5 percent per quarter. The board can amend or suspend the plan, which several large NAV REITs did during redemption waves, so the structure is semiliquid in exactly the same sense as an interval fund or non-traded BDC.
How REIT income is taxed
Most REIT dividends are taxed as ordinary income, not as qualified dividends, because the REIT itself paid no corporate tax on them. Distributions often also include capital gain and return-of-capital components, which are taxed differently and reported on the year-end 1099. Under current US law a portion of ordinary REIT dividends may also qualify for the qualified business income deduction; the fund’s tax reporting breaks this out.
The risks that matter
- Interest rates: REITs borrow to buy property, and property values reprice as rates move.
- Property cycles: oversupply, vacancy, and sector shifts, such as the repricing of offices, land directly in the portfolio.
- Valuation lag: a non-traded REIT’s monthly NAV is appraisal-based and moves more smoothly than the market it reflects.
- Repurchase caps: monthly and quarterly limits mean exits can queue for several quarters once redemptions cluster.
How a REIT compares with the other structures
A REIT is defined by its assets: real estate, held in a tax-electing company. BDCs are the corporate-lending counterpart, while interval and tender-offer funds are 1940 Act wrappers defined by their liquidity mechanics and able to hold many asset classes, including real estate itself. A non-traded NAV REIT, a real estate interval fund, and a real assets tender-offer fund can all express similar exposures with different liquidity, fee, and tax mechanics, which is why comparing structures side by side matters before allocating.
Common questions
What is the difference between a traded and a non-traded REIT?
A traded REIT lists on a stock exchange: continuous pricing, instant liquidity, and stock-market volatility. A non-traded REIT is SEC-registered but unlisted: shares are bought at a periodically struck net asset value, and liquidity comes from a share repurchase plan, commonly capped near 2 percent of NAV monthly and 5 percent quarterly, which the board can suspend. Traded REITs price daily sentiment; non-traded REITs price appraisals.
How does a REIT make money?
An equity REIT earns rent from the properties it owns and operates, plus appreciation when properties are sold. A mortgage REIT earns interest by financing real estate, typically the spread between mortgage yields and its own funding costs. In both cases at least 90 percent of taxable income must be paid out to shareholders as dividends.
What is a NAV REIT?
A NAV REIT is the modern form of the non-traded REIT: an SEC-registered, unlisted REIT that strikes a net asset value monthly, continuously offers shares at that NAV, and repurchases shares through a plan commonly capped at around 2 percent of NAV per month. It is a semiliquid structure, comparable in liquidity terms to an interval fund.
Are REIT dividends taxed as ordinary income?
Mostly, yes. Because a REIT deducts the dividends it pays and avoids corporate tax, most of its distributions are taxed to shareholders as ordinary income rather than as qualified dividends. Portions may be classified as capital gains or return of capital, and under current US law a share of ordinary REIT dividends may qualify for the qualified business income deduction.
How liquid is a non-traded REIT?
Semiliquid at best. You can typically buy monthly at NAV, but exits run through a share repurchase plan with monthly and quarterly caps, and the board can reduce or suspend repurchases when requests cluster, as happened industry-wide during recent redemption waves. Anyone allocating should plan around the caps, not around the monthly purchase convenience.
Educational content by Kesta, the neutral data layer for liquid and semiliquid alternatives. Not investment, legal, or tax advice. Keep learning: What is a BDC? · What is an interval fund? · What is a tender-offer fund? · all guides · fund directory.