Question

1. ( T or F ) Since dividends are not UBTI, a tax exempt investor will not have UBTI on dividend income when debt is used to purchase the stock that paid the dividend.

2. (T or F) An individual, who qualifies as a real estate professional, can treat a particular rental real estate activity as non-passive even when that individual does not materially participate in the real estate activity.

3. (T or F) Withholding tax to non-US investors on interest income and dividends may be reduced under the terms of a treaty.

4. 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 U.S. individual 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. The tax treatment is the same for the US investor as it is for the foreign investor. E. None of the above.

Answer 1

Solution:

Answer 1: The statement is True.

The dividened income are not treated as UBTI and the same is expempted in the hand of the taxpayer.

Answer 2: The statement is False.

Its only treated as a non-passive when the individual particiapte materially.

Answer 3: The statement is True.

As per the double taxation treaty the non US investors should enjoy the benefit of the same and the reduce ubder the terms of the treaty.

Answer 4: The correct answer is C i.e. There is no tax on the net gain at the shareholder level.

Explanation: The capital gain is taxable in the hands of the REIT. The same is not taxable in the hands of shareholders as per the individual capacity. The income is taxed only once and the same will be taxed under capital gain tax in the hands of REIT.