What is the requirement for Real Estate Investment Trusts (REITs) regarding income distribution to beneficiaries?

Real Estate Investment Trusts (REITs) are required to distribute at least 90% of their taxable income to shareholders in the form of dividends in order to maintain their favorable tax status. This requirement encourages REITs to return a significant portion of their earnings to investors, which aligns with the structure and purpose of the investment vehicle, promoting liquidity and making it accessible to a broader range of investors.

This distribution requirement is crucial because it allows REITs to avoid federal income tax on the earnings that are distributed. By fulfilling this obligation, REITs can pass through income directly to investors while mitigating tax liabilities at the corporate level. The emphasis on distributing a substantial portion of income also reflects the underlying nature of real estate investments, which typically generate steady cash flows suitable for dividend payments.