Explaining The 90% REIT Payout Requirement

You will recall that, in order to obtain the tax benefits that come with REIT classification, the entity must pay out 90% of its taxable income as dividends. This terminology is a bit of a red herring in that taxable income is distinguishable from the metric “funds from operations”, which is an indicator of ongoing cash flows.

Owners of rental properties typically follow the standard depreciation schedule that is 27.5 years.

Let’s look at a practical example of what that means. If you own a residential unit worth $100,000, with no debt for the sake of simplicity in focusing on the effects of depreciation, that generates $800 per month in rent with no maintenance costs (for the same sake of simplicity), the funds from operations would be $9,600 each year (i.e. the twelve monthly payments of $800). That’s truly the money coming in.

But, since physical objects on land decline Read the rest of this article!