Series 7 practice questionmediumAlternative Investments — REITs
REIT dividends are generally taxed to shareholders as:
- AOrdinary income, since REITs pass through rental income✓ Correct answer
- BQualified dividends at the lower capital gains rate
- CTax-exempt income similar to municipal bond interest
- DLong-term capital gains regardless of holding period
Explanation
Why A — Ordinary income, since REITs pass through rental income
Most REIT dividends do not qualify for the lower qualified dividend tax rate because they represent pass-through of rental income, which is ordinary income. REIT dividends are generally taxed at the investor's ordinary income tax rate. However, under the Tax Cuts and Jobs Act, non-corporate REIT investors may deduct up to 20% of qualified REIT dividends through the Section 199A deduction.
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