Study guide
7.4 Real Estate Investment Trusts (REITs)
Series 7 General Securities Representative
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1 Introduction
About the Series 7 How to Use This Guide
2 Chapter 1: Equity Securities
1.1 Common Stock Basics 1.2 Dividends and Stock Splits 1.3 Preferred Stock 1.4 Rights and Warrants 1.5 ADRs and Foreign Securities
3 Chapter 2: Debt Securities
2.1 Bond Fundamentals 2.2 Bond Yields and Pricing 2.3 Corporate Bonds 2.4 Bond Features and Risks
4 Chapter 3: U.S. Government & Agency Securities
3.1 Treasury Securities 3.2 Agency Securities 3.3 Mortgage-Backed Securities 3.4 Money Market Instruments
5 Chapter 4: Municipal Securities
4.1 Municipal Bond Basics 4.2 General Obligation Bonds 4.3 Revenue Bonds 4.4 Municipal Bond Analysis 4.5 Municipal Securities Rules
6 Chapter 5: Investment Companies
5.1 Investment Company Basics 5.2 Mutual Funds (Open-End Funds) 5.3 Mutual Fund Pricing and Fees 5.4 Closed-End Funds and ETFs 5.5 Investment Company Taxation
7 Chapter 6: Variable Products & Annuities
6.1 Annuity Basics 6.2 Variable Annuities 6.3 Annuity Taxation 6.4 Variable Life Insurance
8 Chapter 7: Alternative Investments & DPPs
7.1 Direct Participation Program Basics 7.2 Types of DPPs 7.3 DPP Suitability and Risks 7.4 Real Estate Investment Trusts (REITs) 7.5 Hedge Funds and Other Alternatives
9 Chapter 8: Options
8.1 Options Basics 8.2 Long and Short Option Positions 8.3 Hedging Strategies 8.4 Spreads and Combinations 8.5 Index and Non-Equity Options 8.6 Options Account Requirements
10 Chapter 9: Customer Accounts
9.1 Account Types 9.2 Cash Accounts 9.3 Margin Accounts 9.4 Margin Calculations 9.5 Fiduciary and Institutional Accounts
11 Chapter 10: Retirement & Education Plans
10.1 ERISA and Qualified Plans 10.2 Defined Benefit vs. Defined Contribution 10.3 Individual Retirement Accounts 10.4 Education Savings Plans 10.5 Plan Distributions and Taxation
12 Chapter 11: Securities Markets & Trading
11.1 The Primary Market 11.2 The Secondary Market 11.3 Order Types and Execution 11.4 Trade Settlement and Reporting 11.5 Market Participants
13 Chapter 12: Rules, Regulations & Ethics
12.1 Regulatory Framework 12.2 Suitability Requirements 12.3 Communications with the Public 12.4 Prohibited Activities 12.5 Customer Protection Rules 12.6 Ethics and Professional Conduct
7.4 Real Estate Investment Trusts (REITs)
Key Takeaways Explain This Topic AI
A REIT pools capital to own or finance income-producing real estate; most are exchange-listed and far more liquid than DPPs.
Equity REITs earn rent from owned property; mortgage REITs (mREITs) earn interest on real-estate debt; hybrids do both.
To qualify, a REIT must hold 75% of assets in real estate/cash/governments, earn 75% of income from real estate (95% from passive sources), and distribute at least 90% of taxable income.
Ownership tests: at least 100 shareholders for 335 days of the year, and no more than 50% held by 5 or fewer individuals (the 5/50 test).
REITs pass through income but never losses; dividends are mostly taxed as ordinary income but may qualify for the 20% Section 199A deduction.
Last updated: June 2026
What a REIT Is
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate and elects pass-through tax treatment under the Internal Revenue Code. Investors buy shares to gain real-estate exposure without owning property directly . The Series 7 contrast that matters: most REITs are publicly traded and liquid , while DPPs are not, and REITs trade like stocks throughout the day on an exchange.
A REIT is professionally managed and sells shares to the public, giving small investors access to large commercial properties they could never buy alone. Because shares trade on an exchange, an investor can exit at the market price on any trading day — the opposite of a DPP's multi-year lockup. This liquidity, combined with low minimum investment (the price of one share), is exactly why the exam treats REITs as the liquid real-estate vehicle and DPPs as the illiquid one.
The Three Types
Type What it holds Income source Exam note
Equity REIT Physical, income-producing property (malls, apartments, offices, warehouses) Rents + property appreciation Most common type
Mortgage REIT (mREIT) Real-estate loans and mortgage-backed securities Interest Owns no buildings; rate-sensitive, often higher yield/volatility
- Hybrid REIT Both property and mortgages Rents + interest Diversified within real estate
- The Four Qualification Tests
A REIT must satisfy all of these annually to keep pass-through status:
- Test Requirement
- Asset test At least 75% of assets in real estate, cash, or government securities
Income test At least 75% of gross income from real-estate sources (rents, mortgage interest); at least 95% from those plus other passive income (dividends, interest, gains)
Distribution test Distribute at least 90% of taxable income to shareholders
Ownership test At least 100 shareholders for 335 days of a 12-month year, and not more than 50% owned by 5 or fewer individuals (the 5/50 test )
The 90% distribution requirement parallels the Subchapter M "conduit" rule that lets a mutual fund avoid corporate tax — distribute the income, and the entity is not taxed on what it passes through. A REIT that distributes at least 90% of taxable income pays corporate tax only on the small retained sliver; this is why REITs typically have high dividend yields and why income-seeking investors favor them.
The 5/50 closely-held test deserves attention: a REIT fails if more than 50% of its shares are held by five or fewer individuals during the last half of the year. Combined with the 100-shareholder rule (which must be met for at least 335 days of a 12-month year), these ownership tests force a REIT to be genuinely widely held rather than a private vehicle for a handful of owners. The exam often asks for the 100 shareholder minimum and the 5/50 concept by name.
The Single Biggest Distinction: Income Yes, Losses No
A REIT can pass through income to shareholders, but it can never pass through losses . This is the most heavily tested REIT/DPP difference. A DPP (limited partnership) passes through both income and losses , which is exactly why high-bracket investors use DPPs for deductions and why REITs are not tax shelters.
- Feature REIT DPP (Limited Partnership)
- Liquidity High (exchange-listed) Low (no secondary market)
- Minimum investment One share Often $5,000+
- Management Professional General partner
- Pass-through income Yes Yes
- Pass-through losses No Yes
- Tax shelter items None (dividends only) Depreciation, depletion, IDCs
- REIT Taxation
Because a qualifying REIT pays no corporate tax on distributed income, its dividends generally do not receive the qualified-dividend break. They are taxed as ordinary income at the investor's marginal rate, with three nuances:
Section 199A lets individuals deduct 20% of qualified REIT dividends, lowering the effective rate without making them "qualified dividends."
A portion of a distribution can be return of capital , which is not currently taxed but reduces cost basis.
If the REIT distributes capital gains , those are taxed at capital-gains rates; the investor's Form 1099-DIV breaks out the components.
Listed vs. Non-Traded REITs
Not every REIT trades on an exchange. Non-traded REITs are registered with the SEC but illiquid, carry high upfront fees, and resemble DPPs in their redemption limits — a frequent suitability concern. Private REITs are unregistered and sold to institutions/accredited investors.
Non-traded REITs raise a recurring suitability theme: they pay attractive headline yields but can suspend redemptions, and early-investor distributions are sometimes funded partly by new investors' capital rather than property income. A rep must disclose the illiquidity, the front-end load, and the fact that the share price is not set by a public market. Treat them closer to DPPs than to listed REITs when judging suitability.
Exam trap: Do not call REIT dividends "qualified." They are ordinary income (with a possible 20% 199A deduction) precisely because the REIT escaped corporate-level tax, so there is no double taxation to relieve.