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What are the benefits of operating as a real estate investment trust (REIT)?

A company that qualifies as a REIT generally is permitted to deduct dividends paid to stockholders from its taxable income, which reduces the amount of federal corporate-level tax the REIT is required to pay. As a result, and to comply with certain distribution requirements applicable to REITs, most REITs distribute at least 100% of their taxable income to stockholders and, therefore, do not pay federal corporate-level taxes in most circumstances. Most states follow this federal tax treatment and allow REITs to deduct dividends paid to stockholders from their taxable income for state tax purposes. Certain REIT subsidiaries, however, are fully subject to federal and state corporate-level income taxes.