What is the tax application for Real Estate Investment Trusts (REITs)?

Real Estate Investment Trusts (REITs) are designed to offer a special tax structure that allows them to avoid paying federal income taxes at the corporate level, provided they adhere to certain regulations. To qualify for this tax treatment, a REIT must distribute at least 90% of its taxable income to shareholders in the form of dividends. By doing so, they effectively pass the tax burden on to their shareholders, who then pay taxes on the dividends received.

This structure incentivizes investment in real estate, as it allows REITs to retain more capital for growth and expansion. Consequently, shareholders enjoy a streamlined taxation process, only dealing with taxes on the income they personally receive, rather than the REIT itself being taxed.