What is the distribution requirement of Real Estate Investment Trusts (REITs) in terms of taxable income?

Real Estate Investment Trusts (REITs) are established to provide a way for individuals to invest in large-scale, income-producing real estate without direct ownership. To maintain their status, REITs are required by the Internal Revenue Code to distribute a significant portion of their taxable income to shareholders as dividends. Specifically, the distribution requirement mandates that at least 90% of the taxable income must be paid out in dividends. This high distribution threshold enables REITs to avoid federal income taxation at the corporate level, as they transfer the tax burden to shareholders who receive the dividends.

By distributing 90% of their taxable income, REITs promote liquidity for investors, making them an attractive option for those seeking regular income. Moreover, this requirement aligns the interests of shareholders with those of the management, as profits need to be returned to investors rather than retained for growth or expansion, which is a common approach in traditional corporations. This structure encourages a steady income stream while also incentivizing the efficient management of the underlying real estate assets.

Options that suggest lower distribution rates do not align with the established regulations governing REITs, which is why they are not applicable in this context.