REIT is essentially a tax term – as entities classified as a REIT generally do not have to pay federal taxes at the corporate level. As a result of this:
- REITs are allowed to deduct dividends paid to shareholders from taxable income — thus they have the ability to shield 100% of taxable income through distributions to stockholders
- REIT shareholders still have to pay taxes on dividends and capital gains
- Most states honor REIT status and therefore don’t require REITs to pay state taxes
- Like other businesses, but unlike partnerships, a REIT cannot pass any tax losses through to its investors.