Why is it important for REITs to distribute income to unit holders?

For Real Estate Investment Trusts (REITs), distributing a significant portion of their income to unit holders is essential because it allows them to maintain their special tax status. According to the Internal Revenue Code, to qualify as a REIT, an entity must distribute at least 90% of its taxable income to shareholders in the form of dividends. This distribution requirement is crucial because it enables REITs to avoid federal corporate income taxes. As a result, the income is taxed only at the shareholder level, which can ultimately benefit investors by providing them with a more attractive yield on their investments.

While attracting long-term investors and possibly gaining new investors can be positive outcomes of such distributions, they are not the primary reason for the income distribution requirement that REITs must adhere to for tax purposes. Enhancing stock performance is typically influenced by a variety of market factors and company performance metrics, rather than solely by income distributions. Therefore, the focus on avoiding taxes directly ties to the very nature of REIT operations and their structure, making it a fundamental aspect of their financial strategy.