Most corporations are subject to corporate income tax, and as a course of business engage in certain activities that minimize their exposure to that tax. These activities often cost the company money and time that takes away from its core business operation. An investor in one of these corporations, therefore, is not only getting the returns on the core business but also those related to the tax minimization activities.
REITs are required by law to distribute at least 90 percent of their taxable income to maintain REIT status, and most distribute 100 percent or more. REITs have no incentive, therefore, to direct management time and resources to mitigation of core tax consequences. As a result, the returns investors receive are solely the returns on the real estate—and not tied to any tax minimization activities. Instead, REITs are able to focus on the management and development of their real estate assets.