16. Assume a building, owned by a REIT, increases in value and the REIT that own

Question

16. Assume a building, owned by a REIT, increases in value and the REIT that owns it sells the building for $120 million and then makes a capital gain distribution to its shareholders.

Which of the following is true regarding A tax-exempt investor's tax treatment:

A. The gain on the sale will be taxed at the ordinary income tax rate.

B. The gain on the sale will be taxed at the capital gain tax rate.

C. There is no tax on the net gain at the shareholder level.

D. None of the above.

A non-US investor's tax treatment:

A. The gain on the sale will be taxed at the ordinary income tax rate.

B. The gain on the sale will be taxed at the capital gain tax rate.

C. There is no tax on the net gain at the shareholder level.

D. None of the above.

Explanation / Answer

Part A : option B - a tax exempt investor (generally religious bodies/pension funds/charitable organisations) have exemption from paying any tax on income through their direct activities but income from investment partnerships may be taxed as it is considered as unrelated income. Hence option (B).

Part B : For a non -US investor the requirement is for withholding tax. Hence option (D)

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