REIT

To avoid taxation at the entity level, a REIT must distribute at least:

1. A.90% of taxable income to shareholdersCorrect - the 90% distribution test.
2. B.50% of incomeHalf is well short of what the exemption demands. The threshold is set high on purpose, since the point is to pass essentially all the income through to shareholders rather than retain it.
3. C.100% of assetsThis swaps income for assets. Distributing assets would wind the trust down entirely; the requirement concerns the taxable income the REIT earns, and it is 90% of that income.
4. D.25% of incomeA quarter of income would leave the bulk of the earnings inside the trust, which is exactly what the pass-through treatment is designed to prevent. The bar is 90%.

Why: A REIT must distribute at least 90% of its taxable income to shareholders.

An equity REIT generates most of its income from...

1. A.Interest on real estate loansThat describes a mortgage REIT.
2. B.Rents from properties it ownsCorrect — equity REITs earn rental income from owned real estate.
3. C.Option premiumsREITs invest in real estate, not options.
4. D.Annuity paymentsAnnuities are unrelated insurance products.

Why: An equity REIT owns income-producing properties and earns rental income, which it passes to shareholders as dividends. Mortgage REITs, by contrast, earn interest.

A REIT reports 10 million dollars of taxable income for the year. What is the minimum it must distribute to shareholders to preserve its favorable tax treatment?

1. A.9 million dollarsCorrect. Ninety percent of 10 million dollars is 9 million dollars.
2. B.5 million dollarsFifty percent is not a REIT threshold at all.
3. C.10 million dollarsA REIT must distribute at least 90 percent, not all, of taxable income to preserve its status.
4. D.7.5 million dollarsThis uses 75 percent, which relates to the REIT asset and income tests, not the distribution test.

Why: A REIT must distribute at least 90 percent of taxable income to avoid corporate tax on the distributed amount. Ninety percent of 10 million dollars is 9 million dollars.

A hybrid REIT is one that:

1. A.Is organized as a partnership but taxed as a corporationThis describes no REIT category. A REIT is a trust or corporation with a special tax election.
2. B.Invests in both real estate and equity securities of unrelated companiesA REIT must keep the great majority of its assets in real estate related holdings.
3. C.Holds both listed and non-traded shares in its capital structureHybrid refers to the assets held, not to how the shares trade.
4. D.Owns income-producing property and also holds mortgages, earning both rents and interestCorrect. Hybrid means combining the equity and mortgage models.

Why: A hybrid REIT combines the two basic models: it owns income-producing property, like an equity REIT, and also holds mortgages or mortgage-backed loans, like a mortgage REIT. Its income therefore blends rents and interest.