Exercise

Answer true or false.

1. _____ REITs are exempt from federal taxes at the corporate level.

Answer the following questions.

2. Which of the following statements is true?

A. Equity REITs buy mortgages, construction loans and mortgage-backed securities and receive most of their income from interest.

B. Hybrid REITs buy properties and rehab them to energy efficiency standards and receive most of their income from federal tax credits.

C. Mortgage REITs provide financing for real estate projects.

D. A REIT must have at least 1,000 shareholders.

3. What is the best argument for REITs being exempt from corporate taxation?

A. Real estate is a high-risk investment, and being exempt from taxation helps a REIT survive as a business.

B. REITs pass their income through to shareholders, who pay taxes on it.

C. REITs allow investors of all income levels to invest in real estate.

D. All three types of dividend distribution are taxed at the same rate, simplifying taxes on REIT income.

4. According to the IRS, a REIT must return what percentage of its taxable income to shareholders in the form of dividends?

A. 90%

B. 75%

C. The IRS does not specify a percentage

D. 100%

5. What percentage of a REIT’s gross income must come from real estate sources?

A. 90%

B. 75%

C. 95%

D. 50%

6. What percentage of a REIT’s assets must be invested in real estate sources?

A. 90%

B. 75%

C. 95%

D. 50%

Answers

1. False. REITs are completely exempt from federal income tax on corporate income only if they pay out 100% of their earnings to shareholders. They must pay out at least 90% to be exempt from taxes on any portion of their earnings. They must p