The world of investment is vast and varied, and if you’ve ventured into real estate investment, you’ve likely come across the term “REIT.” A REIT, or “real estate investment trust,” is a powerful investment vehicle that allows individuals to invest money into a portfolio of income-generating real estate properties. But, like many other investments, the REIT needs audit and assurance services to get investors on board, maintain its tax benefits to investors, and show that it’s a trustworthy investment option.
In this article, we’ll take a closer look at what exactly a REIT is, the background behind its creation, and why auditing is crucial for these types of investments.
What is a REIT?
A REIT is a company that owns or finances income-generating real estate properties. These properties can include commercial buildings, apartments, retail stores, hotels, shopping centers, and warehouses. Investors can buy shares in publicly traded REITs just like they would for any other stock and become part owners of the real estate properties owned by the REIT.
Why Were REITs Created?
REITS were developed in the 1960s when Congress envisioned making large-scale, income-producing real estate investments accessible to average investors. The REIT Act title was contained in the Cigar Excise Tax Extension of 1960. Before this act, investing in commercial real estate was primarily reserved for only the wealthy. But with REITs, Congress offered all investors a means to tap into these lucrative markets, just as they would invest in other industries—through equity purchases.
Stockholders of a REIT, similar to those in other corporations, get the economic benefits derived from income-producing commercial real estate ownership—advantages such as portfolio diversification, liquidity, strong dividends, and transparency.
How Does a Company Qualify as a REIT?
For a company to be classified as a REIT, rigorous criteria and specific provisions are outlined by the Internal Revenue Code (IRS). A noteworthy requirement is that most of the company’s income and assets must be linked to a real estate investment. Also, it must distribute at least 90% of its taxable income to shareholders annually.
Due to this special structure, most REITS avoid paying corporate tax, passing the tax obligations to the shareholders on dividends received and any capital gains. This setup can be quite tax-efficient, especially since many states exempt these entities from state income tax.
Why is Auditing Critical for Real Estate Investment Trusts?
The IRS has detailed requirements to protect investors’ interests and ensure the company maintains its status as a REIT. But more importantly, to maintain their unique tax status, a REIT must undergo regular audits by independent accounting firms.
Tax Focus: Traditional Corp vs. a REIT
Audits provide investors with transparent and reliable financial information, giving them confidence in the trustworthiness of an investment. While traditional companies and corporations rely on audits for financial operations and SEC oversight, the primary focus of a REIT audit relates to IRS tax compliance.
Because REITs must distribute at least 90% of their taxable income to shareholders, the IRS places a heavy burden on REITs to comply with tax code requirements.
This distinct focus makes understanding the tax implications as important as the audit process for REITs, shaping both their strategic decisions and day-to-day operations.
Selecting an Audit Firm
As a company looking to have its REIT audited, choosing an audit firm experienced in accounting and auditing real estate investment trusts is pivotal.
The best public accounting firms will have an extensive understanding of REITs and the specific tax regulations that govern them. For publicly traded real estate investment trusts, having a CPA firm with PCAOB (Public Company Accounting Oversight Board) registration is also necessary to comply with SEC regulations. They can also provide valuable insights to help mitigate risks and improve operations within the investment trust.
At Assurance Dimensions, our CPA auditors go beyond the standard preparation of financial records—we develop relationships and long-term partnerships with our clients. We want to get to know you and your business so we can provide the audit services you need to make better decisions.
Contact us to request a quote for your next audit.