7888. What are the general requirements that must be met in order for a REIT to qualify for pass-through tax treatment?Alexis Longrcline202014-09-15T13:31:00Z2014-09-15T13:31:00Z24382498Summit Business Media2052931147888. What are the general requirements that must be met in order for a REIT to qualify for pass-through tax treatment?As the name suggests, a real estate investment trust (REIT) is required to invest primarily in assets that are closely connected to real estate. Permissible investments include ownership interests in real property, interest derived from loans where the underlying asset is real property and investments in other REITs.See IRC Sec. 856(c).Importantly, a REIT is required to distribute 90 percent of its annual earnings to shareholders. A company that meets the requirements described below will qualify as a REIT, and therefore be allowed to deduct from its corporate taxable income all of the dividends that it pays out to its shareholders. Because of this special tax treatment, most REITs pay out 100 percent of their taxable income (rather than simply meeting the 90 percent requirement) to shareholders and, therefore, owe no tax at the corporate level. In addition to paying out at least 90 percent of its taxable income in the form of shareholder dividends, a REIT must meet several tests relating to its management, assets, income and diversification. Specifically, a REIT must:be an entity that would be taxable as a domestic corporation “but for” its REIT status;be managed by a board of directors or trustees;have shares that are fully transferable;have a minimum of 100 shareholders after its first year as a REITIRC Sec. 856(a).;have no more than 50 percent of its shares held by five or fewer individuals during the last half of any taxable yearIRC Secs. 856(a)(6), (h), 542(a)(2).; at the close of each quarter, have investments comprising at least 75 percent of its total assets that consist of real estate, cash (including receivables) and government securities.IRC Sec. 856(c)(4)(A). See Q 7880 and Q 7892 to Q 7894;derive at least 75 percent of its gross income from real estate related sources (real estate related sources include gain on the sale of real property, gain from the sale of, or dividends derived from, interests in other REITs, rents derived from real property and interest on mortgages financing real property).IRC Sec. 856(c)(3). See Q 7897 and Q 7898;derive at least 95 percent of its gross income from a combination of real estate related sources and dividends or interest (from any source)IRC Sec. 856(c)(2).; andhave no more than 25 percent of its assets consist of non-government securities or stock in taxable REIT subsidiaries (Q 7901)IRC Sec. 856(c)(4)(B)..