According to investopedia, a REIT is similar to a mutual fund, in that they pool capital to invest in real estate. But as far as I know, REITS do have an IPO, and traded like a stock. My question: is REIT's outstanding shares generally a fixed number or not? If yes, it's more like a stock.
Besides, in this article: Investopedia- The basics of REIT taxation, they say:
While a steady flow of payments may sound enticing, REIT dividends come with unique tax consequences for investors. These payments can constitute ordinary income, capital gains, or a return of capital.
And, they give an example:
An investor buys a REIT currently trading at $20 per unit. The REIT generates $2 per unit from operations and distributes 90% (or $1.80) to unitholders. Of this, $1.20 of the dividend comes from earnings. The remaining $0.60 comes from depreciation and other expenses and is considered a nontaxable return of capital.
The investor would pay ordinary income taxes on the $1.20 in the year in which it was received. Meanwhile, the investor's cost basis is reduced by $0.60 to $19.40 per share. As stated previously, this reduction in basis will be taxed as a either long- or short-term gain or loss when the units are sold.
Based on what the author says, the return of capital lowers the cost basis; hence increase the gain. As far as I know, this increased gain is only on paper, meaning the investor has to pay more tax, whereas he actually realized a smaller gain. Isn't that a bad thing for the investor?
Partnership ETFs, as well, make distributions in the form of return of capital, which cause adjustments to cost basis; and they issue schedule K-1's. So, do REITs also issue a schedule K-1, or are dividends and Profits/Losses from selling the shares only reported on 1099's ?