General Securities Representative (Series 7) Practice Exam

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What is the minimum percentage of profits a REIT must pass through to its investors?

The correct answer is: 90%

A Real Estate Investment Trust (REIT) is required by the Internal Revenue Code to distribute a significant portion of its taxable income to shareholders to qualify for special tax considerations. The correct percentage that must be passed through to investors as dividends is 90%. This requirement ensures that investors receive a substantial amount of the income generated by the REIT, reinforcing the structure's purpose of providing a flow of income, primarily derived from income-generating real estate. Additionally, this 90% distribution requirement allows a REIT to avoid federal income taxation at the corporate level, effectively allowing the income to be taxed only at the investor level. This structure not only incentivizes investors by providing them with higher dividends compared to typical corporations but also encourages REITs to operate efficiently and maintain a focus on income-producing properties. While there are thresholds for other types of distributions (like 75% and 80%), they do not meet the minimum distribution requirement that would allow a REIT to benefit from its tax-advantaged status.