Final answer:
REITs have a favorable tax treatment if they distribute at least 90% of their taxable income to shareholders in the form of dividends. By doing so, they can avoid paying corporate taxes on this distributed income.
Step-by-step explanation:
REITs (Real Estate Investment Trusts) have a favorable tax treatment if they distribute at least 90% of their taxable income to shareholders in the form of dividends. By doing so, REITs are able to avoid paying corporate taxes on this distributed income. However, the shareholders are then responsible for paying taxes on the dividends they receive.
For example, let's say you own shares in a REIT that earns $100,000 in taxable income for the year. If the REIT distributes at least $90,000 of that income to shareholders, the REIT itself does not have to pay corporate taxes on that $90,000. However, as a shareholder, you would have to report and pay taxes on the $90,000 dividend income you received.