Most everybody in the real estate business is familiar with real estate investment trusts. If you are considering opening your venture to a wider selection of investors or minimizing tax impact on investment profits, this could be a good way to organize.
However, there are requirements you would have to meet and considerations you should probably make before you begin the process. Here is a very brief overview of what goes into forming an REIT.
A question of taxes
In a general sense, becoming an REIT is it as simple as meeting the requirements, filing with the California Secretary of State. As explained by the IRS, you would also elect to become an REIT and have the federal government tax you using form 1120. You would probably still file the California form 100 if you were doing so before.
Taxes could be one of the main reasons you and your partners are considering converting to or establishing an REIT. This is a difficult topic and it would depend on your exact situation, but it is true that this type of organizational structure could offer some unique tax benefits.
A matter of requirements
You may have noticed a reference to requirements above. As explained directly on the federal tax for return for REITs, you would need to meet some criteria, including:
- Having 100 investors or more
- Having transferable interests
- Not being closely held
- Your organization being a corporation, association or trust
An issue of timing
It is worth noting that you would not necessarily need to meet all these requirements immediately. As with many business formation and organization matters, there is a timeline involved. For example, you would not have to meet the requirements for minimum investors or non-closely-held status until your second year as an REIT.
These processes are complex and require planning. However, if you know that is the right time to form this type of organization, there is probably a way for you to begin the process sooner rather than later.