ACCA Advanced Taxation (ATX) Practice Exam

How are dividends from Real Estate Investment Trusts (REITs) classified in income tax computations?

1. As capital gains

2. As salary income

3. As property income

4. As interest income

The correct answer is: As property income

Dividends from Real Estate Investment Trusts (REITs) are classified as property income in income tax computations. This classification arises because REITs primarily generate revenue from rents or capital gains derived from real estate investments. When individuals or entities invest in REITs, they receive dividends that represent their share of the income the trust has earned from its property holdings. These distributions reflect the rental income generated from properties and are therefore treated as property income rather than capital gains or any other form of income. This treatment is significant for tax purposes because it affects how the income is taxed and reported. The classification as property income also implies that it may be subject to different tax rates and rules compared to capital gains or salary income, which have their own respective treatments under the tax code. Understanding this classification is crucial for accurate tax planning and compliance for investors in REITs.