REIT Regulation: What You Need to Know About Rules, Taxes, and Investor Protections

When you invest in a REIT, a Real Estate Investment Trust that lets you buy shares in income-producing property like warehouses, apartments, or shopping centers without owning the buildings. Also known as real estate investment trust, it’s one of the few ways regular investors get direct exposure to commercial real estate—with mandatory payouts and strict rules that protect your money. Unlike regular stocks, REITs aren’t just about growth. They’re built to pay out at least 90% of their taxable income as dividends, and that’s not a suggestion—it’s a legal requirement under U.S. tax law. If they don’t hit that number, they lose their special tax status and get taxed like regular corporations. That’s why you see steady dividends from REITs even when the stock market dips.

That payout rule is just one piece of the REIT regulation, the set of federal rules enforced by the SEC and IRS that define how REITs operate, what assets they can hold, and how they must distribute income. The IRS also says a REIT must have at least 75% of its total assets in real estate, cash, or U.S. Treasuries, and at least 75% of its gross income must come from rent, interest on mortgages, or property sales. That keeps REITs focused on real estate and stops them from turning into hedge funds in disguise. Then there’s the ownership rule: no more than 50% of shares can be owned by five or fewer people during the last half of the tax year. This prevents a few big players from controlling the whole thing—and ensures small investors like you still have a fair shot.

These rules exist for a reason. Without them, REITs could become tax shelters for the wealthy or risky speculation vehicles. But they also mean you can’t just throw money into any property fund and call it a REIT. You need to check if it’s truly compliant. A fake REIT might promise high yields but skip the dividend rules or hold too much non-real-estate debt. The SEC requires these funds to file regular reports (10-Ks and 10-Qs), so you can verify their asset mix and income sources. Look for terms like "qualified REIT subsidiary" or "taxable REIT subsidiary" in their filings—those tell you how they’re structured to stay legal.

And then there’s the REIT taxes, the unique way income from REITs is taxed, which differs from dividends from regular stocks. Most REIT dividends are treated as ordinary income, not qualified dividends. That means they’re taxed at your regular income rate, not the lower capital gains rate. Some portions might be classified as return of capital (which lowers your cost basis) or capital gains (from property sales). That’s why you get a Form 1099-DIV each year with boxes broken down by type. You can’t just assume it’s all "dividend income"—misunderstanding this can cost you at tax time.

There’s also dividend requirements, the core obligation that forces REITs to pay out most of their earnings, making them reliable for income-focused investors. This isn’t optional. If a REIT misses the 90% threshold, it pays corporate taxes on the shortfall—and often has to cut dividends the next year to make up for it. That’s why REITs hate holding cash. They’re always looking for new properties or refinancing deals to generate more income to distribute. That’s also why industrial REITs are booming—they’re renting out warehouses to Amazon and FedEx, generating steady rent, and passing it along to you.

What you’ll find below are real, practical guides on how to spot compliant REITs, understand their tax forms, avoid risky ones, and use them in your portfolio without getting burned by hidden rules or bad reporting. These aren’t theory pieces—they’re built from what investors actually deal with when they buy, hold, or sell REITs in 2025.