Wht is Taxation?

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       Investors make money from mutual funds in three basic ways and must
pay taxes on all three of those ways: reinvesting dividends, capital gains taken
as new shares, and dividends taken in cash. Reinvestment of dividends and /or
capital gains does not defer or alter the taxation of those items in any way. The
advantage of reinvesting distributions is the compounding effect of leaving the
shareholder’s money in the fund and the savings of sales charges on the
purchases of new shares. The fund will inform shareholders of the tax status of
its various distributions by providing a yearly statement. The statement will
designate which distributions are considered short term and which are
considered long term as well as how much of the distribution is dividend
       Mutual funds companies may be given special tax treatment if they
comply with specific regulations set forth in Sub-chapter M of the Internal
Revenue Code. The main condition requires that the fund distribute at least
90% of its net investment income to investors as a dividend. The company will
avoid corporate taxation on the 90% it distributes and will pay corporate taxes
only on the other 10%. These dividend pay-outs to the shareholder are
considered long-term capital gains to the investor and would be subject to
taxation. Since this is a distribution of capital gains from the fund, and not a
sale of shares by the investor, the investor has no control and must accept the
distribution and pay taxes on it.
Real Estate Investment Trusts
       Real Estate Investment Trusts (REITs) are trusts that invest in diversified
portfolios of real estate holdings. They purchase real estate, make short-term
loans for construction, long-term mortgage loans, and are highly leveraged.
Publicly registered REITs trade over-the-counter and on the exchanges. The
rules for Regulated Investment Companies set the minimum payout of net
investment income at 90% and the minimum payout of net capital gains income
at 90%. In order to qualify for no federal income tax, a REIT must be
established under a trust indenture, receive 75% of its income from mortgage
income and rents, invest at least 75% of its assets in real estate or real estate
mortgages, and distribute at least 95% of its earnings to its shareholders.
Additionally, in order to pay no federal tax, the REIT must be managed during
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the entire year by one or more trustees who hold legal title to the property and
have control over the management of the trust and the REIT must have at least
100 beneficial owners as evidenced by transferable shares or transferable
certificates of beneficial interest.


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