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11 Cards in this Set
- Front
- Back
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Which of the following are characteristics of a REIT?
1. It is traded on an exchange or OTC. 2. It is professionally managed. 3. It passes through both gains and losses to investors. 4. It is a type of limited partnership. |
Answer: 1&2
A REIT shares some features with a limited partnership, but it is a different type of business entity. REITs are traded on exchanges and OTC and are professionally managed. Both REITs and limited partnerships provide pass-through of gains to investors, but REITs do not provide pass-through of losses. |
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If a customer holds certificates of beneficial interest in a REIT, each of the following statements regarding this investment is true EXCEPT:
A) investors receive dividends periodically. B) the certificates are publicly traded. C) the issuer must redeem certificates on shareholder request. D) a mortgage REIT represents pooled capital for real estate financing. |
Answer: C
REITs are not redeemed by the issuer. REITs are publicly traded units that represent either an interest in pooled capital for real estate financing or an interest in real property and that pass through income and capital gains distributions to investors. Investors who wish to liquidate their interests must sell them in the secondary market. |
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All of the following characteristics are advantages of a REIT EXCEPT:
A) liquidity B) diversification C) professional management D) tax deferral |
Answer: D
A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and OTC, which provides liquidity. The IRS does not permit tax deferrals on REIT investments. |
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If a client who seeks diversification through real estate is concerned about illiquidity associated with investing in real estate, which of the following investments is MOST suitable?
A) Direct investment in a shopping center renting retail space to a broad variety of stores. B) Privately placed investment. C) REIT D) Interest in a real estate limited partnership. |
Answer: C
REITs are best suited to the client because they are market-traded securities that provide an investor with a liquid market in which to invest in real estate. |
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All of the following are true of REITs EXCEPT:
A) they must pass along losses to shareholders. B) they must invest at least 75% of their assets in real estate related activities. C) they must distribute at least 90% of their net investment income, to qualify under Subchapter M. D) shares are publicly traded. |
Answer: A
REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. While they can pass through income, they cannot pass through losses; they are no DPPs. |
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REITs can distribute all of the following to their shareholders EXCEPT:
A) capital gains B) cash dividends C) stock dividends D) capital losses |
Answer: D |
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Cash dividends from REITs are:
A) taxed as ordinary income. B) taxed at a maximum rate for qualified dividends. C) taxed as long-term capital gains. D) not taxed. |
Answer: A
Cash dividends from REITs are taxed as ordinary income. A maximum rate for qualified dividends, which applies to qualified common stock dividends, does not apply to dividends from REITs.
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Which of the following is an equity security?
A) Mortgage-secured bond B) Collateralized mortgage obligation C) Government National Mortgage Association pass-through certificate D) Real Estate Investment Trust share |
Answer: D
A REIT share is an equity security that represents undivided ownership in a portfolio of real estate investments. The other choices are debt securities. |
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A company set up to invest in real estate, mortgages, construction and development loans that must distribute at least 90% of its net income to avoid paying taxes on the income distributed is called:
A) a unit investment trust (UIT) B) an open-end investment co. C) a trust indenture D) a real estate investment trust (REIT) |
Answer: D |
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Which of the following characteristics are applicable to REITs?
A) Dividends from REITs are taxed as ordinary income. B) REITs have guaranteed minimum dividends. C) Any losses from the real estate portfolio flow through to the REIT shareholders. D) REIT shares cannot be bought or sold in the secondary market and are, therefore, considered illiquid. |
Answer: A
While income flows through to REIT shareholders in the form of dividends, losses do not flow through. When a REIT pays a dividend, it will be taxed as ordinary income, but there are no guaranteed minimum dividend payouts. They trade both on exchanges and OTC and are considered to be liquid investments. |
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Which of the following statements regarding REITs are TRUE?
1. Hybrid REITs invest in both commercial property and residential property. 2. Some REITs hold no real property but hold mortgages on commercial property instead. 3. All dividend disbursements made by REITs will be recognized as qualified dividends by the IRS. 4. Dividends are taxed at the investor's ordinary income tax rate. |
Answer: 2 & 4
Equity REITs can hold residential and commercial property, mortgage REITs hold mortgages on property, and hybrid REITs do both. Dividend disbursements made by trusts are not recognized as qualified dividends and will be taxable to the investor at their ordinary income tax rate. |
