REITs (Real Estate Investment Trusts) Explained for the SIE Exam

A REIT — real estate investment trust — is a company that owns, operates, or finances income-producing real estate, and most REITs trade on an exchange just like a stock. A REIT pools investors’ money, collects rent or mortgage interest, and passes that income through to shareholders as dividends. The key exam point: a REIT passes income through but not losses — the opposite of a direct participation program. On the SIE — 75 scored questions in 105 minutes, passing score 70 — REITs sit in “Understanding Products and Their Risks,” the largest section at 44% of the exam.

What a REIT is

A REIT is essentially a stock in a real estate company. It might own office buildings, apartments, shopping centers, or hotels — or it might finance them. By law, REITs must focus on real estate assets and income, which lets everyday investors share in real-estate profits without buying property directly. Most REITs are publicly traded, so you can buy shares through a broker like any stock, collect a portion of the properties’ rents (or mortgage interest) as dividends, and benefit if the REIT grows in value.

One structural note: a REIT is its own kind of tax entity (a tax election under the tax code), not a registered investment company under the Investment Company Act of 1940 — unlike a mutual fund or ETF.

Example: Buy shares of an office-building REIT and you indirectly own a slice of that property’s rent stream. The REIT collects rent from tenants and pays you part of it as a dividend — real-estate exposure and income, without managing the property yourself.

REIT vs DPP: the key contrast

Both REITs and DPPs (usually limited partnerships) let investors participate in real estate, but their tax and liquidity treatment differ sharply — and the exam tests the difference directly.

• Income pass-through. Both pass income to investors: a REIT as dividends, a DPP as a share of partnership income.
• Loss pass-through — the key split. A DPP passes through losses and deductions that investors can use against other passive income. A REIT does not — REIT shareholders can’t deduct REIT losses. A REIT passes positive income only; losses stay at the corporate level.
• Liquidity. A publicly traded REIT is liquid — you sell shares on an exchange. DPPs (and non-traded REITs) are illiquid, with no easy exit and opaque valuations.
• Structure. REITs are corporations or trusts with shareholders; DPPs are partnerships or LLCs with partners.

The one-liner: a REIT passes through income only and is usually a liquid, exchange-traded stock; a DPP passes through both income and losses and is an illiquid partnership.

REIT qualification rules

To earn its special tax treatment, a company has to meet strict tests — often shorthanded as 75/75/90:

• 90% distribution. It must distribute at least 90% of its taxable income to shareholders each year. This is why REITs pay such large dividends.
• 75% of assets. At least 75% of total assets must be in real estate, cash, and U.S. Treasuries.
• 75% of income. At least 75% of gross income must come from real-estate sources — rents, interest on mortgages secured by real estate, and gains from property sales.
• Shareholder rules. A REIT must have at least 100 shareholders, and no more than 50% of shares can be held by five or fewer individuals (the “5/50 rule”).

Meet these and the REIT generally pays no corporate tax on the income it distributes — the profits flow to investors, who pay tax on the dividends. Fail them and the REIT loses its favorable status, so REITs follow these rules closely.

The three types of REITs

• Equity REITs own and operate income-producing property — apartments, offices, malls. Their revenue is mainly rent (plus property sales). These are the most common type.
• Mortgage REITs (mREITs) invest in mortgages or mortgage-backed securities instead of owning property. Their revenue is mainly interest, which makes them more sensitive to interest-rate moves.
• Hybrid REITs combine both approaches. They exist but are less common; most REITs pick one lane.

The exam shortcut: equity REITs earn rent; mortgage REITs earn interest.

Taxation

A REIT’s tax advantage comes from that 90% distribution: by paying out most of its taxable income (and using the dividends-paid deduction), the REIT generally avoids corporate tax on the distributed portion. So REIT income is taxed essentially once, at the shareholder level — no corporate double taxation on what’s paid out.

For the investor, the key point is that REIT dividends are generally taxed as ordinary income, not at the lower qualified-dividend rate that most stock dividends get. (A portion may be eligible for a pass-through deduction under current tax law, but REIT payouts are generally treated as non-qualified.) And remember: only income passes through — REIT shareholders can’t use REIT losses as deductions.

Listed vs non-traded vs private REITs

REITs also differ by how they’re sold and traded, and this is where liquidity and suitability come in:

• Publicly traded REITs are SEC-registered and listed on exchanges. They’re liquid — buy and sell like any stock — with transparent pricing. Most well-known REITs are here.
• Public non-traded REITs are SEC-registered but do not trade on an exchange. They often advertise high dividends, but shares are illiquid — hard to sell, with opaque valuations, restrictive redemption terms, and often high upfront fees. Real suitability concerns.
• Private REITs aren’t registered with the SEC and don’t trade anywhere. They’re generally sold only to institutional or accredited investors, and are the least liquid with the fewest disclosures.

Because non-traded and private REITs lock up capital, they suit only long-term investors who can afford the illiquidity — unlike publicly traded REITs, which trade freely.

At a glance

Feature	REIT	DPP
Income pass-through	Yes — as dividends	Yes — share of partnership income
Loss pass-through	No — losses stay at the entity	Yes — losses flow to investors
Liquidity	Liquid if exchange-traded	Illiquid
Structure	Corporation or trust (shares)	Partnership or LLC (units)
Investor tax	Dividends, generally ordinary income	Income and losses, via K-1

Feature	Equity REIT	Mortgage REIT
Primary income	Rent from property	Interest on real-estate loans
What it holds	Physical property	Mortgages / MBS
Rate sensitivity	Moderate	High

Benefits and risks

Benefits. REITs give ordinary investors easy access to real estate, historically with high dividend yields. They diversify a portfolio because real estate often moves differently from stocks and bonds, and rent increases can make them a partial inflation hedge. Publicly traded REITs add the liquidity that owning property directly lacks.

Risks. REITs carry real-estate market risk — falling property values or tenant defaults hurt performance. They’re sensitive to interest rates: rising rates lift borrowing costs and make high-dividend stocks less attractive, and mortgage REITs feel rate moves especially hard. Publicly traded REITs also swing with the stock market. Non-traded REITs pile on extra risk — poor liquidity, high fees, and prices that are hard to track — so any investor in them must be ready to lock up funds.

Exam traps to avoid

• Income yes, losses no. A REIT passes through income (as dividends) but not losses. A DPP passes through both. This is the most-tested REIT distinction.
• The 90% rule. A REIT must distribute at least 90% of its taxable income to keep its tax status.
• The 75% tests. 75% of assets in real estate/cash/Treasuries, and 75% of income from rents and mortgage interest.
• Equity vs mortgage. Equity REITs earn mainly rent; mortgage REITs earn mainly interest. Don’t swap them.
• Dividends are ordinary income. Most REIT dividends are taxed as ordinary income, not at the lower qualified rate.
• Non-traded ≠ liquid. Non-traded REITs are illiquid even though they’re SEC-registered. Don’t assume “registered” means “easily traded.”

Once income-not-losses, 75/75/90, equity-vs-mortgage, and the traded/non-traded/private ladder feel automatic, test yourself with the free SIE diagnostic to see how the SIE actually frames REIT questions.

Frequently asked questions

What is a REIT?

A REIT is a company that owns or finances income-producing real estate and is structured to pay most of its earnings to shareholders as dividends. It lets investors buy shares — like a stock — in a diversified real-estate portfolio and earn rental or mortgage income through those dividends.

What’s the difference between a REIT and a DPP?

A REIT is a corporation or trust (shares) that passes rental or mortgage income to shareholders as dividends; a DPP is usually a partnership (units). The key difference: a REIT distributes income but does not pass losses to investors, whereas a DPP passes through both income and losses.

Do REITs pass through losses to investors?

No. Unlike a partnership, a REIT can’t pass losses to shareholders. REIT investors receive income distributions (dividends) from profits, but never tax-deductible losses — those stay at the entity level.

What’s the difference between an equity REIT and a mortgage REIT?

An equity REIT owns properties and earns money mainly from rent (and property sales). A mortgage REIT invests in mortgages or loans secured by real estate and earns mainly interest. In short, equity REITs earn rent from tenants; mortgage REITs earn interest from borrowers.

How are REIT dividends taxed?

Most REIT dividends are taxed as ordinary income to the shareholder, not at the lower qualified-dividend rate that applies to most stock dividends. A portion may be eligible for a pass-through deduction under current tax law, but REIT payouts are generally non-qualified. The REIT itself usually avoids corporate double taxation by distributing at least 90% of its income.

Are non-traded REITs liquid?

No. Publicly traded REITs are liquid, but non-traded REITs are not — their shares don’t trade on an exchange, so selling can be hard or impossible on short notice. Prices aren’t regularly quoted, and they often impose holding periods and high fees, which makes them suitable only for long-term investors who can lock up capital.

The quick way through REITs: a REIT owns or finances real estate, trades like a stock, and passes income through as dividends but never losses — the opposite of a DPP. Add the 75/75/90 qualification rules, “equity earns rent, mortgage earns interest,” and “dividends are ordinary income,” and the REIT questions on the SIE are yours.