In: Finance
Explain the difference between a corporation that only holds real estate and a REIT.
(Select all the choices that apply.)
A.
REITs must pay corporate income taxes; a corporation that holds only real estate does not pay corporate taxes but must substantially pass through all the income to shareholders to whom it is taxable.
B.
A corporation that holds only real estate must pay corporate income taxes; REITs do not pay corporate taxes but must substantially pass through all the income to trust unit holders to whom it is taxable.
C.
A corporation that holds only real estate is limited to 75 shareholders and cannot have corporate or foreign stockholders.
D.
REITs are limited to 150 shareholders and cannot have corporate or foreign stockholders.
Real Estate Investment Trust or REIT is a company that runs the business of investing through real estate. REITs usually owns a number of shares in different infrastructure companies, REITs are available for investors who have no need or requirement for investing & maintaining the cost or expenses for maintaining their own property or infrastructure, but are interesting in creating the profits through the fluctuations in infrastructure markets.
On the other head, a corporation that holds only real estate are the real infrastructure companies that owns & maintains the different infrastructures in the form of ready to move or under construction projects. Their main customers are the persons who wish to buy the properties in physical form.
Analysis on Points
A. REITs must pay corporate income taxes; a corporation that holds only real estate does not pay corporate taxes but must substantially pass through all the income to shareholders to whom it is taxable.
: Income earned by REITs are not taxable in the hands of REITs as corporate income tax, however since the maximum income earned by them have to be returned to investors, the same is taxable in the hands of investors.
Corporation that holds only real estate, does pay corporate taxes & have no such condition to pass the income to shareholders.
Thus, Point A is not Correct
B. A corporation that holds only real estate must pay corporate income taxes; REITs do not pay corporate taxes but must substantially pass through all the income to trust unit holders to whom it is taxable.
: Point B is correct As this is the condition of the REITs to substantially pass through all the income to the investors, the same is taxable in the hands of investors. Also, Corporation that holds only real estate, does pay corporate taxes.
C. A corporation that holds only real estate is limited to 75 shareholders and cannot have corporate or foreign stockholders.
: There is no limit to number of shareholders in a Corporation that holds only real estate. Any nationality of person can invest in the same. Thus, Point C is incorrect.
D. REITs are limited to 150 shareholders and cannot have corporate or foreign stockholders.
: Although a minimum limit is prescribed for number of shareholders in case of REITs which is 100, there is no maximum shareholders limit. Thus, Point D is incorrect.