What minimum percentage of income must REITs distribute to shareholders to qualify for tax benefits?

To qualify for tax benefits, Real Estate Investment Trusts (REITs) must distribute at least 90% of their taxable income to shareholders in the form of dividends. This requirement is crucial because it allows REITs to avoid federal income tax at the corporate level, which is a significant advantage for these entities. By distributing such a high percentage of their income, REITs can provide consistent returns to investors while also maintaining their status as a pass-through entity.

The 90% distribution rule encourages REITs to reinvest less of their earnings, ensuring that investors receive a substantial share of the profits. This operational model attracts investors looking for income-generating investments, as the distribution policy aligns with their expectations for regular cash flow. The remaining 10% of income can be retained for operational expenses, development of new properties, or other investment opportunities to foster growth. Thus, the correct answer highlights the importance of this specific percentage in the context of tax compliance for REITs.