NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesMedium
A client is considering investing in a real estate investment trust (REIT) and asks their adviser about its tax implications. Which of the following statements regarding REITs and taxation is MOST accurate?
- AInvestors in REITs can deduct a portion of their investment as a depreciation expense.
- BREITs are required to distribute at least 90% of their taxable income to shareholders to avoid corporate taxation.
- CDividends from REITs are typically taxed as qualified dividends, eligible for lower capital gains rates.
- DREITs are generally exempt from corporate income tax if they distribute at least 50% of their taxable income to shareholders.
Show answer & explanationAnswer & explanation
Correct answer: B. REITs are required to distribute at least 90% of their taxable income to shareholders to avoid corporate taxation.
To qualify as a REIT and avoid corporate income tax, a company must distribute at least 90% of its taxable income to shareholders annually. These distributions are then generally taxed as ordinary income to the shareholders.
Why the other options are wrong
- A. REIT investors cannot directly deduct depreciation; this benefit is realized at the corporate level and passed through via the tax-exempt status.
- C. REIT dividends are typically taxed as ordinary income, not qualified dividends.
- D. The distribution requirement is 90%, not 50%.
REIT Taxation
Real Estate Investment Trusts (REITs) avoid corporate income tax if they distribute at least 90% of their taxable income to shareholders annually, with these distributions typically taxed as ordinary income to investors.
- Must distribute >= 90% of taxable income to shareholders.
- Avoids double taxation at the corporate level.
- Dividends generally taxed as ordinary income to investors.
Memory trick: REITs give 90 to get zero corporate tax.