How to Sell Your REIT Shares

If you’re wondering how to sell your real estate investment trust (REIT) shares, don’t worry. The process is fairly simple. You typically start by contacting your brokerage or financial advisor, who will facilitate the transaction. The price you receive will depend on the current market value, which fluctuates based on the REIT’s performance and broader real estate trends. But a comprehensive understanding of the steps involved will help inform more nuanced decisions like choosing between publicly traded and non-traded REITs. Here’s a closer look at how to sell a REIT.

A financial advisor can provide insights into REITs and other assets for your investment portfolio.

What Are REITs and How Do They Work?

REITs are firms that handle, invest in, or finance real estate. They allow individuals to invest in large-scale, income-producing properties across various sectors without the need for direct ownership. REITs commonly focus on commercial assets, including office complexes, retail centers, residential apartments, hotels and infrastructure such as cell towers and data centers.

REITs work by pooling investor money to purchase or finance properties. They must pay out at least 90% of their taxable income to shareholders as dividends, which allows investors to earn a share of the income generated by the properties, such as rent or interest payments, while benefiting from potential long-term property appreciation.

There are three types of REITs. Publicly traded REITs are listed on major stock exchanges. Non-traded REITs, aren’t publicly listed but still offer returns to investors. Hybrid REITs are a blend of both, as each provides an accessible way for individuals to diversify their portfolios with real estate exposure.

How to Sell a REIT

Selling REIT shares can vary depending on whether you hold publicly traded or non-traded REITs. Here’s a closer look at how to sell a REIT depending on which type you have.

Selling Publicly Traded REITs

Publicly traded REITs are generally easier to sell. You can sell your shares through your brokerage account just like you would with stocks.

The process is straightforward, and liquidity is typically not an issue, allowing you to sell your shares quickly at market value. However, market conditions may affect the price you receive, as the value of REIT shares can fluctuate with broader market trends.

Selling Non-Traded REITs

Non-traded REITs, on the other hand, can present more challenges when selling. These REITs are not listed on public exchanges, so they don’t offer the same level of liquidity as publicly traded REITs. Investors may not be able to sell until they hold non-traded REITs for a set period of time, usually five to seven years.

Even when the lock-up period ends, selling can be difficult due to limited buyers and shares may have to be sold at a discount. While some non-traded REITs have redemption programs that allow investors to sell a limited number of shares back to the REIT, this is typically done at a reduced value.

Fees can also be a stumbling block when selling REITs, especially with non-traded REITs. Some investors may encounter early withdrawal penalties or fees that cut into their returns, sometimes by as much as 15% of the offering price. Before selling, it’s a good idea to review your REIT’s specific terms to understand any restrictions or costs involved. Consulting with a financial advisor can also help you navigate potential hurdles and decide on the best time to sell.

Factors to Consider Before Selling a REIT

An investor reviews the performance of a REIT that she owns and decides whether to sell it or not.

Before you decide to sell your REIT shares, it’s worth taking a step back to evaluate whether now is the right time. Several market and personal factors can influence the outcome:

Interest Rates: Rising interest rates often put downward pressure on REIT prices because higher yields on safer assets like bonds can make REIT dividends less attractive. Conversely, when rates fall, REIT valuations may rise.
Real Estate Market Trends: Broader conditions in the real estate sector such as occupancy rates, rental demand, and property values can directly impact a REIT’s performance and share price.
Dividend History: If the REIT has maintained or grown its REIT dividends over time, holding onto it may provide steady income even during periods of price volatility.
Portfolio Diversification: Selling a REIT may reduce your exposure to real estate as an asset class. Consider whether that aligns with your long-term investment strategy or if you’ll need to replace that exposure elsewhere.
Liquidity Needs: If you need immediate access to cash for expenses or other investments, selling may make sense, but weigh the potential trade-off of selling in a down market.

Tax Implications of Selling REITs

When selling REIT shares, you may encounter tax consequences based on how long you’ve held the shares and the type of income they generate.

If you sell your REIT shares for more than you paid, the profit is considered a capital gain. For shares held less than a year, you’ll pay short-term capital gains taxes, which are taxed at your ordinary income tax rate. For shares held longer than a year, you’ll qualify for the lower long-term capital gains tax rate, which can be more favorable.

In addition to capital gains, REIT dividends also carry specific tax implications. Since REITs distribute at least 90% of their income to shareholders, these dividends are typically taxed as ordinary income, rather than at the lower qualified dividend tax rate. Some dividends may qualify for a 20% pass-through deduction under current tax laws in place through the end of 2025, which can reduce the amount of tax you owe.

For example, imagine an investor named Sarah who bought REIT shares for $50,000 and sold them five years later for $80,000. Because she held the shares for more than a year, her $30,000 profit is taxed at the lower long-term capital gains rate. During ownership, the dividends she received were taxed as ordinary income.

Bottom Line

A financial advisor looks over a client's portfolio on his tablet to determine whether or not to sell a REIT the client owns.

When and how you’ll sell your REIT shares involves a few key factors, such as the type of REIT you hold and any potential tax obligations. Publicly traded REITs are typically easier to sell, offering liquidity similar to stocks, while non-traded REITs may come with restrictions and investment fees that could affect your return. Additionally, gains from selling REIT shares are subject to capital gains taxes, with long-term holdings often receiving more favorable tax treatment.

Tips for Investing in REITs

One of the main appeals of REITs is their regular dividend income. Review the dividend yield, but also check the payout ratio to ensure that the REIT’s distributions are sustainable. A payout ratio over 90% may signal the company is overextending itself to meet dividend commitments.
A financial advisor can help you assess whether REITs are a good fit for your portfolio and which ones to potentially invest in. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.