7.4 Real Estate Investment Trusts (REITs)
REITs allow retail investors to invest in commercial real estate portfolios without direct property management. FINRA frequently tests the 75-75-90 test and the vital distinction between REITs and DPPs.
Key FINRA Exam Takeaways
- REITs are NOT DPPs: They pass through income and capital gains, but NEVER pass through losses.
- The 75-75-90 Test: At least 75% of assets in real estate/mortgages, 75% gross income from real estate rents/mortgage interest, and must distribute at least 90% of taxable income to avoid corporate taxation.
- Types: Equity REITs (own physical properties), Mortgage REITs (lend money/buy mortgages), Hybrid REITs (both).
- Public REITs trade on exchanges like regular common stock, providing immediate intraday liquidity.
- Non-traded REITs are illiquid and carry high upfront distribution fees.
| Attribute | Public Real Estate Investment Trust (REIT) | Real Estate Limited Partnership (DPP) |
|---|---|---|
| Pass-Through of Profits | Yes (Must distribute ≥90% of taxable income) | Yes (All income passes through) |
| Pass-Through of Losses | NO (Losses do NOT pass to shareholders) | YES (Passive losses pass through) |
| Liquidity | High (Liquid exchange trading) | Illiquid (No public market, GP approval needed) |
| Legal Structure | Corporation / Trust | Limited Partnership |
| Tax Filing Form | Form 1099-DIV | Schedule K-1 |
Knowledge Checkpoint • Section 7.4
To maintain its corporate tax exemption on distributed income under federal guidelines, what percentage of its taxable income must a Real Estate Investment Trust (REIT) distribute annually to shareholders?