Answer-first summary for fast verification
Answer: Security 2
## Explanation To qualify as a tax-advantaged REIT (Real Estate Investment Trust), a security must meet several requirements: 1. **Income Test**: At least 75% of gross income must come from real estate sources (rents, mortgage interest, etc.) 2. **Asset Test**: At least 75% of assets must be real estate assets, cash, or government securities 3. **Distribution Requirement**: At least 90% of taxable income must be distributed to shareholders Let's analyze each security: **Security 1**: - 90% of income from mortgage interest ✓ (meets income test) - 0% of assets for sale/development ✓ (likely meets asset test) - 90% distribution rate ✓ (meets distribution requirement) **Security 2**: - Only 5% of income from real estate sources ✗ (fails income test) - 75% of assets for sale/development ✗ (likely fails asset test) - 100% distribution rate ✓ (meets distribution requirement) **Security 3**: - 75% of income from mortgage interest ✓ (meets income test) - 0% of assets for sale/development ✓ (likely meets asset test) - 50% distribution rate ✗ (fails distribution requirement) Only **Security 1** meets all three requirements: - Income test: 90% from real estate sources ✓ - Asset test: 0% for sale/development suggests real estate assets ✓ - Distribution: 90% to shareholders ✓ Therefore, Security 2 most likely qualifies as a tax-advantaged REIT.
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An analyst gathers the following information about three publicly traded real estate securities:
| Security 1 | Security 2 | Security 3 | |
|---|---|---|---|
| Percentage of assets for sale, under development | 0 | 75 | 0 |
| Percentage of income derived from interest on mortgages | 90 | 5 | 75 |
| Percentage of taxable income distributed to shareholders | 90 | 100 | 50 |
Which of the following real estate securities most likely qualifies as a tax-advantaged REIT?
A
Security 1
B
Security 2
C
Security 3