SEBI amends small and medium REITs regulations - ET RealEstate (2024)

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SEBI amends small and medium REITs regulations - ET RealEstate? ›

Each scheme of the SM REIT shall be identified by a separate name, which shall not be misleading and shall not portray any guaranteed returns to the investors. The minimum offer and allotment to the public in each scheme of SM REIT shall be at least 25 per cent. of the total outstanding units of such scheme.

The Securities and Exchange Board of India (SEBI) notified in March 2024 the regulations governing Small and Medium Real Estate Investment Trusts (SM REITs) to establish a well-defined regulatory framework for the Fractional Ownership Platforms (FOPs).

Invest at least 75% of total assets in real estate, cash, or U.S. Treasurys. Derive at least 75% of gross income from rent, interest on mortgages that finance real estate, or real estate sales. Pay a minimum of 90% of their taxable income to their shareholders through dividends.

Real estate investment trusts (REITs) are companies that own real estate. You can buy shares in REITs similar to stock, and you mainly make money from REITs through dividends. REITs often own apartments, warehouses, self-storage facilities, malls and hotels.

Specifically, a company must meet the following requirements to qualify as a REIT: Invest at least 75% of total assets in real estate or cash. Earn at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales.

The notification of framework of SM REIT through SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024 will increase access to real estate investments, facilitate pooled investment in a wider range of real estate assets as a regulated financial product, thereby facilitating further growth of REITs in India ...

For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.

A REIT cannot be closely held. A REIT will be closely held if more than 50 percent of the value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals at any point during the last half of the taxable year, (this is commonly referred to as the 5/50 test).

80-20 Rule: At least 80% of a REIT's asset value must be in completed and income-generating real estate, with the remaining 20% able to be invested in riskier assets such as under construction buildings, equity shares, bonds, cash, or under-construction commercial property.

30% Rule. This rule was introduced with the Tax Cut and Jobs Act (TCJA) and is part of Section 163(j) of the IRS Code. It states that a REIT may not deduct business interest expenses that exceed 30% of adjusted taxable income. REITs use debt financing, where the business interest expense comes in.

What is the 90% rule for REITs? ›

By law, REITs must distribute at least 90% of their taxable income to shareholders. This means most dividends investors receive are taxed as ordinary income at their marginal tax rates rather than lower qualified dividend rates. Any profit is subject to capital gains tax when investors sell REIT shares.

The potential downsides, or CONS, of a REIT investment include the fact that they are taxed as income, the variation in the fee structures of different managers, and market volatility due to interest rate movements or trends in the real estate market.

More than a year of interest rate hikes by the Federal Reserve pushed down returns on real estate investment trusts, or REITs. While higher rates negatively impacted nearly every sector of the economy in 2022 and most of 2023, real estate was hit especially hard.

Taxes & REIT Investment

REIT dividends can be taxed at different rates because they can be allocated to ordinary income, capital gains and return of capital. The maximum capital gains tax rate of 20% (plus the 3.8% Medicare Surtax) applies generally to the sale of REIT stock.

Unlike many companies however, REIT incomes are not taxed at the corporate level. That means REITs avoid the dreaded “double-taxation” of corporate tax and personal income tax. Instead, REITs are sheltered from corporate taxes so their investors are only taxed once.

Equity REITs

Properties can generate rental income, which, after collecting fees for property management, provides income to its investors. These REITs generate income from renting real estate to tenants. After paying expenses for operation, equity REITs pay out dividends to their shareholders on a yearly basis.

REITs operate under certain restrictions, which afford REITs specific tax benefits. One of those restrictions is that REITs must distribute (i.e., dividends) 90% of their taxable income to investors. If there are no earnings to distribute, the distribution is considered a return of capital and not taxed.

By law, REITs must distribute at least 90% of their taxable income to shareholders. This means most dividends investors receive are taxed as ordinary income at their marginal tax rates rather than lower qualified dividend rates. Any profit is subject to capital gains tax when investors sell REIT shares.

For each tax year, the REIT must derive: at least 75 percent of its gross income from real property-related sources; and. at least 95 percent of its gross income from real property-related sources, dividends, interest, securities, and certain mineral royalty income.