Real Estate Investment Trusts (REITs): 75% Asset/Income Tests & 90% Conduit Rule
Under Subchapter M of the Internal Revenue Code, what requirements must a Real Estate Investment Trust (REIT) satisfy to avoid entity-level corporate income taxation on its distributed earnings?
To qualify as a REIT and avoid corporate tax: 75% assets in real estate/cash, 75% income from real estate rents/mortgages, and distribute at least 90% of taxable income.
Complete Analysis & Legal Rationale
Under the Internal Revenue Code, a REIT acts as a tax conduit if it satisfies three main criteria: (1) Asset Test: At least 75% of total assets must be invested in real estate, mortgages, cash, or government securities; (2) Income Test: At least 75% of gross income must be derived from real estate rents, mortgage interest, or property sales; (3) Distribution Test: The REIT must distribute at least 90% of its net taxable income annually to shareholders. Crucially: REITs pass through income and capital gains, but NEVER pass through tax losses to shareholders.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
To qualify as a REIT and avoid corporate tax: 75% assets in real estate/cash, 75% income from real estate rents/mortgages, and distribute at least 90% of taxable income.
Fails to adhere to packaged product rules for B.
Fails to adhere to packaged product rules for C.
Fails to adhere to packaged product rules for D.
Official Standard: Under the Internal Revenue Code, a REIT acts as a tax conduit if it satisfies three main criteria: (1) Asset Test: At least 75% of total assets must b