1.9.0 - REAL ESTATE INVESTMENT TRUSTS (REITs)
What is a REIT?
A company that manages a portfolio of real estate investments in order to earn profits for shareholders. REITs are normally traded publicly and serve as a source of long-term financing for real estate projects.
Which of the following is an equity security? A) Real estate investment trust share. B) Mortgage-secured bond. C) Collateralized mortgage obligation. D) Government National Mortgage Association pass-through certificate.
A) Real estate investment trust share. A REIT share is an equity security that represents undivided ownership in a portfolio of real estate investments. The other choices are debt securities. Reference: 1.9 in the License Exam Manual
Which of the following terms or phrases does NOT apply to REITs? A) Secondary market. B) Redeemable. C) Managed. D) Dividends taxed at full ordinary income rates
B) Redeemable. REITs trade in the secondary market and are not redeemable. The real estate portfolio is actively managed, and dividends paid by REITs do not meet the requirements to be taxed as qualified dividends and are, therefore, taxed as ordinary income. Reference: 1.9 in the License Exam Manual
How can a REIT avoid being taxed as a corporation?
By having at least 75% of total investment assets in real estate. Deriving at least 75% of gross income from rents or mortgage interest. Distributing 90% or more of its net investment income to its shareholders.
Cash dividends from REITs are: A) taxed at a maximum rate for qualified dividends. B) taxed as long-term capital gains. C) taxed as ordinary income. D) not taxed.
C) taxed as ordinary income. Cash dividends from REITs are taxed as ordinary income. A maximum rate for qualified dividends, which applies to qualified common stock dividends, does not apply to dividends from REITs. Reference: 1.9 in the License Exam Manual
What does REIT stand for?
Real Estate Investment Trust
All of the following are true of REITs EXCEPT: A) they must to qualify under Subchapter M, distribute at least 90% of their net investment income. B) they must pass along losses to shareholders. C) shares are publicly traded. D) they must invest at least 75% of their assets in real estate-related activities.
B) they must pass along losses to shareholders. REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. While they can pass through income, they cannot pass through any losses; they are not DPPs. Reference: 1.9 in the License Exam Manual
A company set up to invest in real estate, mortgages, construction, and development loans that must distribute at least 90% of its net income to avoid paying taxes on the income distributed is called: A) a real estate investment trust. B) a trust indenture. C) an open-end investment company. D) a unit investment trust.
A) a real estate investment trust. A real estate investment trust, in order to avoid tax on its income, must distribute 90% of its net investment income to investors. Reference: 1.9 in the License Exam Manual
