What is the tax advantage for a company thatqualifies as a REIT?

Question

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Answer 1

A REIT is similar to a closed-end fund because the stock is publicly traded and the market price can differ from that of the REIT's NAV. Tax advantages are available to a company that qualifies as a REIT. Specifically, under the U.S. federal tax code, dividends paid by a corporation cannot be taken as a tax deduction in determining taxable income, resulting in the double taxation of corporate income (i.e., taxes are paid at the corporate level and then taxed again when distributed to shareholders). This disadvantage is avoided by a company that qualifies as a REIT because the company is permitted to deduct the dividends paid to its shareholders in determining its corporate taxable income. Shareholders are only taxed when the dividends are paid to them. The same federal income tax treatment applied to REITs is followed by most states. Consequently, to avoid double taxation of income, most REITs follow a dividend distribution policy wherein all their taxable income is distributed to their shareholders and therefore no corporate taxes are paid.