REITS

Question 1

Describe a real estate investment trust – REIT

Answer 1

Type of closed in investment

Invests in real estate, short-term construction loans, and mortgages

Question 2

Are REITs, marketable, and do they trade?

Answer 2

They are not marketable, but trust shares are listed on an exchange or traded over-the-counter

Question 3

What are characteristics of a mortgage REIT?

How is income determined?

Answer 3

Highly leveraged

Income comes from the spread between lending rate and borrowing rate

Question 4

What are the minimum investments that should be in an REIT?

Answer 4

75% of the REIT’s income must come from real estate investments.

15% can come from securities like GNMAs

Question 5

When is a mortgage REIT deemed to be a good investment?

Answer 5

Interest earned on the mortgage and construction loans EXCEEDS the REIT borrowing costs

Question 6

What is the tax treatment on an REIT?

Answer 6

If the REIT distributes 90% of the net investment income or more, it only pays tax on the under distributed portion.

Question 7

What happens if the REIT fails to distribute the 90%?

Answer 7

Then all the net investment income is taxable to the REIT as an entity

Question 8

What is an advantage in terms of dividend deduction for REIT shareholders?

Answer 8

Shareholders deduct 20% of the REIT dividend income.

However, if capital gains, can NOT deduct distribution

Question 9

Because of this 20% deduction, what did this do to the federal tax rate? What type of account would an REIT be best for?

Answer 9

Lowered the tax rate by 20%

A non-taxable account so that it can absorb the tax