NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
A client is considering investing in a Real Estate Investment Trust (REIT). The client is primarily interested in current income. Which of the following statements regarding REIT dividends is most accurate?
- AREIT dividends are always tax-exempt at the federal level.
- BREITs are required to distribute at least 90% of their taxable income to shareholders annually.
- CREIT dividends are typically taxed as qualified dividends at lower capital gains rates.
- DREIT dividends are generally considered return of capital and are not taxed until shares are sold.
Show answer & explanationAnswer & explanation
Correct answer: B. REITs are required to distribute at least 90% of their taxable income to shareholders annually.
To avoid corporate income tax, REITs are required by law to distribute at least 90% of their taxable income to shareholders annually. This makes them attractive for income-seeking investors, though their dividends are typically taxed as ordinary income, not qualified dividends.
Why the other options are wrong
- A. REIT dividends are taxable at the federal level as ordinary income; they are not tax-exempt.
- C. REIT dividends are generally taxed as ordinary income, not qualified dividends, making them less tax-efficient than some other dividend-paying stocks.
- D. While a portion of REIT distributions can sometimes be classified as return of capital, this is not the general rule for their primary income distributions.
REIT Dividend Taxation
The tax treatment of distributions received from Real Estate Investment Trusts, which are typically taxed as ordinary income to shareholders, unlike qualified dividends from C-corporations.
- REITs must distribute 90% of taxable income to avoid corporate tax.
- Dividends are generally taxed as ordinary income.
- Offers income and diversification to real estate without direct ownership.
Memory trick: REITs: Real estate income, usually taxed as ordinary income.