Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

Which entity typically governs the operations of a REIT?

1. State governments

2. IRS regulations

3. Local real estate boards

4. Partner agreements

The correct answer is: IRS regulations

The governance of a Real Estate Investment Trust (REIT) is fundamentally influenced by IRS regulations. REITs must adhere to specific federal tax regulations to qualify for special tax considerations, which include the requirements for income distribution, asset composition, and ownership structures. The IRS imposes these rules to ensure that the REIT operates primarily as a real estate investment vehicle and not as a regular corporation focusing on conventional business activities. Governance is also shaped by the structure and operational framework that the REIT establishes, like a board of trustees or directors, but these individuals must operate within the confines set forth by IRS regulations. Meeting the eligibility criteria is crucial for maintaining their REIT status and avoiding taxation at the corporate level, which is why IRS regulations are integral to the governance of REIT operations. In contrast, while state governments, local real estate boards, and partner agreements may play roles in the operational aspects of real estate transactions or facilitate certain local governance measures, they do not set the foundational tax and operational structures specific to REITs at the federal level.