REITs
Companies that own or finance income-producing real estate and pass income to shareholders; to avoid corporate tax a REIT must distribute at least 90% of its taxable income, which is why REIT dividends are taxed as ordinary income.
Expect a “which dividend is NOT qualified?” item where the REIT is the answer, or a flip side asking why REIT yields look high — the tell is the 90% payout mandate, which forces large distributions of pass-through income taxed at ordinary rates, not the lower qualified rate. A favorite pairs REITs against DPPs: a REIT passes through income and capital gains but NOT losses, while a DPP limited partner gets flow-through of both income and losses. If a question dangles “tax shelter” or paper losses, the answer is the DPP, never the REIT.
The classic trap is treating REITs as investment companies under the 1940 Act — they invest in property/mortgages, not a securities portfolio, so RIA/40-Act language is a distractor. Don’t confuse the 90% income-distribution test with the qualification thresholds that 75% of assets be real-estate-related and 75% of gross income derive from real estate (a separate 95% gross-income test also applies). A listed REIT trades and votes like common stock, but its dividends stay ordinary income. Memory hook: REITs rent out income, not losses.
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