FINRA Series 7Investment Information and Suitable RecommendationsEasy
A REIT must distribute what minimum percentage of its taxable income to shareholders each year to maintain its favorable tax status?
- A95%
- B100%
- C90%
- D75%
Show answer & explanationAnswer & explanation
Correct answer: C. 90%
Under the Internal Revenue Code, a REIT must distribute at least 90% of its taxable income to shareholders annually to qualify for pass-through tax treatment and avoid corporate-level taxation.
Why the other options are wrong
- A. Incorrect — 95% was the old rule prior to 2001 tax law changes.
- B. Incorrect — 100% distribution is not required, though many REITs distribute nearly all income.
- D. Incorrect — 75% relates to REIT asset/income tests, not the distribution requirement.
REIT Distribution Requirement
A REIT must distribute at least 90% of its taxable income annually to shareholders to retain its special tax status (avoiding double taxation).
- 90% distribution required by IRC
- REITs avoid corporate tax if requirement met
- Dividends generally taxed as ordinary income to shareholders
- REITs offer real estate exposure without direct ownership
Memory trick: REITs must give away '90 to stay.'