Final answer:
A REIT must comply with certain guidelines to pass gains to shareholders, including investing at least 75% of assets in real estate, deriving 75% of income from property-related sources, and paying out at least 90% of taxable income as dividends to avoid double taxation.
Step-by-step explanation:
The criteria for a Real Estate Investment Trust (REIT) to pass through gains to shareholders involve the REIT maintaining its status by complying with certain guidelines. A REIT must invest at least 75% of its total assets in real estate, derive at least 75% of its gross income from rents or interest on mortgages financing real property, and pay out at least 90% of its taxable income in the form of shareholder dividends each year. By adhering to these requirements, the REIT is allowed to deduct the dividends paid to its shareholders from its corporate taxable income, hence avoiding double taxation. This structure means that shareholders are then responsible for paying taxes on the dividends received and any capital gains on the sale of REIT shares.