Which statement about REITs is true?

Which statement about REITs is true?

• A. They are taxed on property income at corporate rate
• B. No tax on property income or capital gains if at least 90% distributed to shareholders
• C. They are tax-exempt on all income
• D. They pay tax on all capital gains

Answer: (B)

REITs are structured to avoid tax at the corporate level if they pass through most of their income to investors. The key rule is that, when a REIT distributes at least 90% of its taxable income to shareholders, it generally does not pay corporate tax on that income, and capital gains are not taxed at the REIT level. Instead, the tax burden falls with the investors who receive the distributions or who realize gains themselves. This is why the statement describing no tax on property income or capital gains under the 90% distribution condition is true. If the distribution requirement isn’t met, the REIT would face corporate tax on undistributed income, and investors would still be taxed on the distributions they receive. The other options aren’t correct because a REIT is not tax-exempt on all income, and capital gains aren’t taxed away from the entity under the 90% rule.

REITs are structured to avoid tax at the corporate level if they pass through most of their income to investors. The key rule is that, when a REIT distributes at least 90% of its taxable income to shareholders, it generally does not pay corporate tax on that income, and capital gains are not taxed at the REIT level. Instead, the tax burden falls with the investors who receive the distributions or who realize gains themselves. This is why the statement describing no tax on property income or capital gains under the 90% distribution condition is true. If the distribution requirement isn’t met, the REIT would face corporate tax on undistributed income, and investors would still be taxed on the distributions they receive. The other options aren’t correct because a REIT is not tax-exempt on all income, and capital gains aren’t taxed away from the entity under the 90% rule.