REIT accounting: tax, distributions and reporting

What is a REIT?

A real estate investment trust is a company or trust that owns income-producing property and has elected into a tax regime that exempts it from tax on qualifying property income and gains, in return for meeting conditions on what it owns, where its income comes from and how much it distributes. Investors are taxed on the distributions instead. More than 40 countries have REIT regimes, including the United States, the United Kingdom, Singapore, the UAE and Pakistan.

Is there a special accounting standard for REITs?

No. A REIT reporting under IFRS applies the same standards as any other property company, and most choose the fair value model for investment property. A US REIT applies US GAAP, holding real estate at depreciated cost. The REIT-specific questions are tax, distributions and the classification of trust units.

What conditions do REIT regimes impose?

Conditions differ in the detail, but most regimes combine a distribution requirement, an asset test and an income test, often with rules on gearing and on how widely the shares are held. Breaching them can end REIT status and bring income back into tax, so REITs monitor the tests at each reporting date and disclose the regime they rely on.

REIT accounting: a REIT compared with a taxed property company

Two property companies each earn rental profit of CU 100 million and record a fair value gain of 40 million on their buildings. One is a REIT whose regime exempts rental profit and gains and requires 90% of rental profit to be distributed. The other is taxed at 25% on both, and its deferred tax on the gain is measured at the same rate.

The REIT keeps 35 million more profit but must pay out 90 million of its rental profit, leaving little to reinvest. REITs therefore fund growth mainly with new equity and debt, which is why their gearing and interest cover are watched so closely.

How does REIT status affect deferred tax?

Deferred tax is measured at the rate that applies to the way the company expects to recover the asset. If a REIT expects to keep its status and its gains on property are exempt, that rate is nil, so no deferred tax is recognised on revaluation gains. When a company joins a REIT regime, it derecognises deferred tax that no longer applies; this is a change in tax status, and the effect goes to profit or loss unless it relates to items originally recognised outside profit. Any entry charge payable on joining is a tax expense when the company becomes liable. Income outside the regime, such as development for sale or a taxable services subsidiary, is still taxed, with current and deferred tax as usual. See deferred tax on investment property.

Are REIT units equity or liabilities?

For REITs structured as companies, shares are normally equity, and dividends are recognised when declared. For REITs structured as trusts, the trust deed matters under IAS 32. If it contractually obliges the trust to distribute a set share of its income, that obligation is a financial liability, and units may be wholly or partly a liability. If distributions are at the discretion of the trustee or manager, even if the trust intends to pay them to keep its tax status, the units can be equity. Units the holder can return to the trust for cash are equity only if they meet the narrow puttable instrument exception.

What performance measures do REITs report?

Because fair value gains swing profit, REITs report measures that strip them out. European REITs follow the EPRA Best Practices Recommendations: EPRA earnings excludes valuation movements and gains on disposal, and EPRA net tangible assets measures net asset value per share. US REITs report funds from operations, FFO, as defined by Nareit: net income excluding depreciation of real estate and gains on sale, plus adjusted FFO. Under IFRS 18, from 2027, earnings measures such as EPRA earnings and FFO, which are subtotals of income and expenses used in public communications, are likely to be management-defined performance measures that must be reconciled in the notes; net asset measures are not. See IFRS 18 management performance measures.

How does a US REIT's accounting differ?

A US REIT reports under US GAAP, so its properties are at depreciated cost with impairment testing, and gains appear only on sale. It records little or no income tax because it deducts the dividends it pays, while taxable REIT subsidiaries pay tax normally. That makes FFO, which adds back depreciation, its headline earnings measure. See investment property: fair value or cost and real estate accounting.

This guide is general information. It is not tax or legal advice for your situation.