SIE Ready🧩 DPPs, REITs & Alternatives · Lesson 2 of 4 · 5 min
REITs: Owning Buildings Through a Share
🏢 You can own a slice of 200 shopping centers for the price of one share. That is a REIT, and its tax deal comes with a payout rule.
💡 Key idea
REITs must pay out at least 90% of taxable income; dividends are ordinary income, and losses do not flow through.
🧠 Why it matters
A REAL ESTATE INVESTMENT TRUST (REIT) is a company that owns or finances income-producing real estate. Three kinds: • EQUITY REITs own properties and earn rent. • MORTGAGE REITs lend or buy mortgages and earn interest. • HYBRID REITs do both. To avoid corporate tax on what it pays out, a REIT must distribute at least 90% of its taxable income to shareholders as dividends each year. Those dividends are generally taxed as ordinary income. Unlike a DPP, a REIT does NOT pass losses through to investors (mnemonic: "90 out the door, losses stay in"). PUBLICLY TRADED REITs list on an exchange and are liquid. NON-TRADED REITs are SEC-registered but not listed: hard to sell, and upfront fees often total about 9–10%. Private REITs are not registered with the SEC.
📈 In the real world
🏬 Mr. Okafor owns shares of an exchange-listed REIT and a non-traded REIT. When he needs cash, he sells the listed shares within minutes. The non-traded REIT offers only limited redemptions, and this quarter's requests exceed the cap, so he must wait. Same asset class, very different liquidity.
📌 Takeaways
- Equity REITs earn rent; mortgage REITs earn interest; hybrids do both
- Must distribute at least 90% of taxable income; dividends taxed as ordinary income
- Listed REITs are liquid; non-traded REITs are illiquid and costly to buy
📖 Terms in this lesson
Real estate investment trust (REIT): A company that owns or finances real estate and must distribute at least 90% of its taxable income to keep its tax treatment.
Non-traded REIT: A REIT not listed on an exchange, which can make shares hard to sell.
✅ Test yourself
To avoid corporate tax on income it distributes, a REIT must pay shareholders at least what share of its taxable income?
- 90%
- 75%
- 50%
- 100%
Answer: A · 90%
A REIT must distribute at least 90% of its taxable income each year. Many pay more, but 90% is the floor. 75% and 50% are too low; 100% is not the legal minimum.
A REIT that earns most of its income from interest on loans secured by real estate is best described as which type?
- An equity REIT
- A non-traded REIT
- A real estate DPP
- A mortgage REIT
Answer: D · A mortgage REIT
Mortgage REITs make or buy real estate loans and earn interest. Equity REITs own property and collect rent. 'Non-traded' describes how shares are sold, not what the REIT owns, and a DPP is a partnership, not a REIT.
How does a REIT differ from a real estate limited partnership for tax purposes?
- A REIT pays no dividends until it is sold
- A REIT passes its losses through to shareholders
- A REIT's dividends are always tax-free
- A REIT does not pass losses through to investors
Answer: D · A REIT does not pass losses through to investors
A REIT avoids corporate tax on distributed income but cannot pass losses to shareholders; a limited partnership can. REIT dividends are generally taxable as ordinary income, and REITs pay dividends regularly to meet the 90% rule.
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