Series 7 Exam Question 338: Answer and Explanation

Question: 338

Which of the following is/are true of a REIT?

I. It must invest at least 75 percent of its assets in real-estate-related activities.

II. It must be organized as a trust.

III. It must distribute at least 90 percent of its net investment income.

IV. It must pass along losses to shareholders.

• A. I, II, III, and IV
• B. I, II, and III
• C. I only
• D. II and IV

Correct Answer: B

Explanation:

B. Choice (B) is the correct answer because three components are true about a REIT. As indicated by its acronym, a REIT is a Real Estate Investment Trust. REITs engage in real-estate activities and are organized as trusts. In order to qualify for favorable tax treatment, a REIT must pass through at least 90 percent of its net investment income to its shareholders. Statement IV is false because, although a REIT can pass through income to investors, it can't pass through losses.