When structuring a Real Estate Investment Trust (REIT), one of the most common misconceptions is that all REITs require at least 100 shareholders to qualify for favorable tax treatment. A quick Google search might tell you this is a hard requirement — but what does the law actually say?
Breaking Down the 100-Shareholder Myth
The 100-shareholder rule comes from IRC Section 856(a)(5), which states that a corporation must be beneficially owned by at least 100 persons during at least 335 days of a taxable year to qualify as a REIT for tax purposes. However, this requirement only applies to REITs seeking federal REIT tax classification under the IRC. If a REIT is privately held and does not elect REIT tax treatment, it does not need to meet this requirement.
What the Law Actually Says
A privately held REIT that does not elect REIT tax treatment under IRS Section 856 can still operate as a corporation without the 100-shareholder rule. Supporting case law includes:
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PLR 200813005 – The IRS confirmed that a corporation structured as a REIT that does not elect to be treated as a REIT for tax purposes is not subject to the 100-shareholder requirement.
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GCM 38718 (1981) – Clarified that a company failing to meet REIT qualification defaults to being taxed as a C-Corporation.
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Snow v. Commissioner, 97 T.C. 14 (1991) – Emphasized that corporations choosing not to elect REIT status are treated under general corporate tax rules.
Strategic Approach: Using a Private REIT to Your Advantage
A REIT is required to distribute 90% of its taxable income to shareholders as dividends. The strategy: purchase all real estate through the REIT, make your Wyoming Holding Company the majority shareholder, and let the REIT distribute money back to your holding company. That’s how you build real estate wealth through a structure that protects your personal assets.
